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Item 7. Management’s Discussion and Analysis

2022-03-09 compared with 2021-03-10 · 370 added, 500 removed, 412 unchanged (68% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with the information in our consolidated annual audited financial statements and the notes thereto, each of which are contained in Item 8 entitled "Financial Statements and Supplementary Data," and other financial information included herein.

entitled "Financial Statements and Supplementary Data," and other financial information included herein.

Some of the information contained in this discussion and analysis includes forward-looking statements that involve risks and uncertainties.

You should review the "Risk Factors" section as well as the section below entitled "Special Note Regarding Forward-Looking Statements" for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Unless the context otherwise requires, in this Annual Report on Form 10-K, "HC2" means HC2 Holdings, Inc.

and the "Company," "we" and "our" mean HC2 together with its consolidated subsidiaries.

Unless the context otherwise requires, in this Annual Report on Form 10-K, "INNOVATE" means INNOVATE Corp.

(formerly known as HC2 Holdings, Inc.) and the "Company," "we" and "our" mean INNOVATE together with its consolidated subsidiaries.

GAAP" means accounting principles accepted in the United States of America.

We are a diversified holding company with principal operations conducted through five operating platforms or reportable segments:

Infrastructure ("DBMG"), Life Sciences ("Pansend"), Spectrum, Insurance ("CIG"), and Other, which includes businesses that do not meet the separately reportable segment thresholds.

We are a diversified holding company with principal operations conducted through three operating platforms or reportable segments:

Infrastructure ("DBMG"), Life Sciences ("Pansend"), and Spectrum, plus our Other segment, which includes businesses that do not meet the separately reportable segment thresholds.

Certain previous year amounts have been reclassified to conform with current year presentations, including:

• The recasting of GMSL's, ICS's, and Beyond6's results to discontinued operations.

• The recast of Beyond6, ICS, and CIG's results to discontinued operations.

Further, the reclassification of prior period assets and liabilities have been classified as held for sale.

• As a result of the sale of GMSL, ICS, and Beyond6, and in accordance with Accounting Standards Codification ("ASC") 280, the Company no longer includes the results of operations and balance sheets of these entities as separate segments.

These entities and our investment in HMN have been reclassified to the Other segment.

• The recasting of Earnings Per Share ("EPS") in the prior period, as a result of the discontinued operations noted above.

Discontinued Operations for further information;

• As a result of the sale of ICS, and in accordance with ASC 280, the Company no longer considers the results of operations and Balance Sheets of ICS as a separate segment.

Formerly the Telecommunications segment, this entity has been reclassified to the Other segment.

Operating Segment and Related Information for further information;

• As a result of the sale of Beyond6, and in accordance with ASC 280, the Company no longer considers the results of operations and Balance Sheets of Beyond6 as a separate segment.

Formerly the Clean Energy segment, this entity has been reclassified to the Other segment.

Operating Segment and Related Information for further information;

• As a result of the sale of CIG, and in accordance with ASC 280, the Company no longer considers the results of operations and Balance Sheets of CIG as a separate segment.

Formerly the Insurance segment, this entity has been reclassified to the Other segment.

Operating Segment and Related Information for further information;

• The recast of prior year earnings per share as a result of the discontinued operations noted above.

This includes presenting EPS for Net (loss) income from continuing operations, Net (loss) income from discontinuing operations, and Net (loss) income.

Basic and Diluted Income (Loss) Per Common Share for further details.

Our Operations

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Organization and Business to our Consolidated Financial Statements for additional information.

Seasonality and Cyclical Patterns

Cyclical Patterns

Our segments' operations can be highly cyclical.

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COVID-19 Impact on our Business

On March 11, 2020, the World Health Organization declared the outbreak of the novel coronavirus ("COVID-19") pandemic resulting in action from federal, state and local governments that has significantly affected virtually all facets of the U.S.

and global economies.

federal and various state governments, have implemented enhanced screenings, quarantine requirements, and travel restrictions in connection with the COVID-19 outbreak.

The Company’s top priority is to protect its employees and their families, and those of the Company’s customers.

The Company continues to take precautionary measures as directed by health authorities and the local government, including changing operational procedures as necessary, providing additional protective gear and cleaning to protect them, which has resulted and may continue to result in disruptions to and increased costs of the Company’s operations.

We may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers, partners, vendors, and suppliers.

On March 11, 2020, the World Health Organization declared the outbreak of a novel coronavirus ("COVID-19") as a pandemic, and on March 13, 2020, the United States declared the pandemic to be a national emergency.

As COVID-19 spread throughout the country, the situation has continued to evolve, including, more recently, the increasing adoption of the COVID-19 vaccine and the reopening of state economies, although increasing rates of infection with recently identified variants of COVID-19, including the "Delta" and "Omicron" variants, have prompted some authorities to reintroduce mask mandates and other restrictions.

The Company’s top priority has been to protect its employees and their families, and those of the Company’s customers.

The Company continues to take precautionary measures as directed by health authorities and local governments, including changing operational procedures as necessary, providing additional protective gear and cleaning to protect personnel and customers, which has resulted and may continue to result in disruptions to and increased costs of the Company’s operations.

We may take further action as may be required by government authorities or that we determine are in the best interests of our employees, customers, partners, vendors, and suppliers.

Work-from-home and other measures introduce additional operational risks, including cybersecurity risks, and have affected the way we conduct our operations.

There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus, and illness and workforce disruptions could lead to unavailability of key personnel and harm our ability to perform critical functions.

The extent of the impact of COVID-19 on our operational and financial performance will depend on future developments, including, but not limited to, the duration and spread of the outbreak, the outbreak of any new strains of the coronavirus, and related travel advisories and restrictions, and its impact to the U.S.

As the vaccine rollout has commenced, certain employees have begun to return to the office, either full-time or part-time.

There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus, including any new strains of the virus, and illness and workforce disruptions could lead to unavailability of key personnel and harm our ability to perform critical functions.

The extent of the impact of COVID-19 on our operational and financial performance will depend on future developments, including, but not limited to, the duration and spread of the outbreak, the effectiveness of the vaccine program, the outbreak of any new strains of the coronavirus, and related travel advisories and restrictions, and its impact to the U.S.

and global financial markets, all of which are highly uncertain and cannot be predicted.

Preventing the effects from and responding to this market disruption if any other public health threat, related or otherwise, may further increase costs of our business and may have a material adverse effect on our business, financial condition, and results of operations.

COVID-19 has caused supply chain challenges related to labor shortages and supply chain disruptions, which may create significant delays in our ability to complete projects or deliver products.

The receipt of material from impacted areas has been slowed or disrupted and our suppliers are expected to face similar challenges in fulfilling orders.

In addition, reductions in the number of ocean carrier voyages, ocean freight capacity issues, congestion at major international gateways and other economic factors continue to persist worldwide due to COVID-19 and worldwide supply impacts as there is much greater demand for shipping and reduced capacity and equipment, which has resulted in recent price increases per shipping container.

In addition, in the United States, trucking costs have risen dramatically due to driver shortages and increased labor costs, as well as new federal and state safety, environmental and labor regulations.

These changes, as well as COVID-19 related state and local restrictions on domestic trucking and the operation of distribution centers, may disrupt our supply chain, which may result in a delay in the completion of our projects and cause us to incur significant additional costs.

Although we may attempt to pass on certain of these increased costs to our customers, we may not be able to pass all of these cost increases on to our customers.

As a result, our margins may be adversely impacted by such cost increases.

These supply chain disruptions and transportation challenges could have a material adverse effect on our results of operations or financial condition.

We continue to monitor the evolving situation and guidance from authorities, including federal, state and local public health departments, and may take additional actions based on their recommendations.

In these circumstances, there may be developments outside our control requiring us to adjust our plans.

As such, given the dynamic nature of this situation, we cannot reasonably estimate the impact of COVID-19 on our results of operations, financial condition, or cash flows in the future.

However, we do expect that it could have a material adverse impact on our future revenue growth as well as our overall profitability and may lead to revised payment terms with certain of our customers.

As such, given the dynamic nature of this situation, we cannot reasonably estimate the impact of COVID-19 on our results of operations, financial condition, or cash flows in the future, but it could have a material adverse impact on our future revenue growth as well as our overall profitability and may lead to revised payment terms with certain of our customers.

During the year ended December 31, 2021, the effects of COVID-19 and the related actions undertaken in the U.S.

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DBMG is dependent on its workforce to carry out its services.

Developments resulting from governmental responses to COVID-19 such as social distancing and shelter-in-place directives have impacted, and will continue to impact, DBMG’s ability to deploy its workforce in its facilities and project sites efficiently.

Developments resulting from governmental responses to COVID-19 such as social distancing and shelter-in-place directives have impacted, and could continue to impact, DBMG’s ability to deploy its workforce in its facilities and project sites efficiently.

The nature of DBMG’s business does not permit alternative workforce arrangements in its facilities and project sites such as remote work schemes to be implemented effectively, and as a result of potential workforce disruptions, DBMG may continue to experience delays or suspensions of projects.

DBMG has incurred significant costs related to additional procedures to maintain COVID-19 related safety measures.

During the year ended December 31, 2020, $19.4 million of COVID-19 related expenses were incurred.

During the year ended December 31, 2021 and 2020, $8.6 million and $19.4 million of COVID-19 related expenses were incurred, respectively.

The majority of these expenses related to payroll costs for safety and cleaning procedures in DBMG's shops and in the field, and personal protective equipment for employees.

DBMG may also experience disruptions in the supply chain depending on the spread of COVID-19 and related governmental orders.

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This could cause the timing of revenue to be delayed and possibly impact earnings and backlog.

Persistent delays, suspensions or

cancellations of projects under contract may occur while governments implement policies designed to respond to the COVID-19 pandemic.

Any such continued loss or suspension of projects under contract may negatively impact the DBMG’s results of operations, cash flows or financial condition.

As a result of COVID-19, our Spectrum segment has experienced adverse effects on its advertising business because of weakness in the advertising market as advertisers seek to reduce their own costs in response to the pandemic’s impact on their businesses.

We are not able to predict when or whether advertising budgets and the advertising market generally will return or be comparable to historical levels.

Persistent delays, suspensions or cancellations of projects under contract may occur while governments implement policies designed to respond to the COVID-19 pandemic.

Any such continued loss or suspension of projects under contract may negatively impact DBMG’s results of operations, cash flows or financial condition.

As a result of COVID-19, our Spectrum segment previously experienced adverse effects on its advertising business because of weakness in the advertising market as advertisers sought to reduce their own costs in response to the pandemic’s impact on their businesses.

While we are not able to predict when or whether advertising budgets and the advertising market generally will return or be comparable to historical levels, our Spectrum segment's advertising business appears to have begun to stabilize as the vaccination program within the U.S.

progresses and additional businesses begin to reopen.

In addition, COVID-19 could impact our Spectrum segment’s business, financial condition and results of operations in a number of other ways, including, but not limited to:

• negative impact on our broadcast station revenue, as many of our customers also rely on advertising revenues and might be negatively affected by COVID-19;

• slow-down of our ability to build out additional broadcast television stations, as illness, social distancing, and other pandemic-related precautions may result in equipment delivery delays and labor shortages, including the availability of tower crews, an already limited, highly-specialized work force necessary to install broadcast equipment;

• negative impact on our network distribution revenues, as consumers may seek to reduce discretionary spending by cutting back or foregoing subscriptions to cable television or other multichannel video programming distributors;

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For further discussion regarding the potential future impacts of COVID-19 and related economic conditions on the Company's liquidity and capital resources, see "Part I-Item 1A-Risk Factors."

Our Insurance segment has been impacted by the COVID-19 pandemic, including multiple reductions in target interest rates by the Board of Governors of the Federal Reserve System, and significant market volatility, driving actual and projected results of our business operations as well as our views on potential effectiveness of certain prudent and feasible tax planning strategies.

The Company’s December 31, 2020 results reflected in earnings are primarily impacted by the Insurance segment's net unrealized losses on investments of $6.5 million, included in the Net realized and unrealized gains (loss) on investments line, primarily driven by preferred stock mark to market adjustments.

The impact on other comprehensive income was $244.1 million of unrealized gain on fixed maturity securities at December 31, 2020, a significant improvement as compared to prior quarter results, which reflected $355.5 million of unrealized loss at March 31, 2020, $9.2 million of unrealized gain at June 30, 2020, and $91.2 million of unrealized gain at September 30, 2020.

The unrealized gains and losses were largely attributable to market factors caused by the COVID-19 crisis.

The unrealized gains and losses are considered temporary in nature, as we have the ability to hold these securities to maturity.

Acquisitions and Dispositions

On January 30, 2020, the Company announced that, through its indirect subsidiary GMH in which the Company holds an approximately 73% controlling interest, the Company entered into a definitive agreement to sell 100% of the shares of GMSL to Trafalgar AcquisitionCo, Ltd.

and an affiliate of J.F.

Lehman & Company, LLC.

The total base consideration was $250.0 million, subject to customary purchase price adjustments, working capital adjustments, and a potential earn-out of up to $12.5 million at such time, if any, if J.F.

Lehman & Company, LLC and its investment affiliates achieve a specified multiple of their invested capital.

The purchase price is subject to customary potential downward or upward post-closing adjustments based on net working capital, cash, unpaid transaction expenses, indebtedness and certain of the Company’s pre-closing paid capital expenditures.

The Share Purchase Agreement contains customary representations, warranties and covenants for a transaction of this nature.

In connection with the closing of the transaction, the purchaser deposited (i) $1.25 million of the base price into an escrow fund for the purpose of securing certain indemnification obligations

for losses payable in the first twelve months after closing and (ii) $1.91 million of the base price into an escrow fund for the purpose of securing a purchase price adjustment, if any, in favor of purchaser.

Following the closing, the purchaser shall pay an amount equal to $2.4 million on the earlier of December 31, 2020 and the date on which a cash collateralized bonding facility is released.

The transaction closed on February 28, 2020.

GMH received approximately $144.0 million of net proceeds from the sale, of which $36.8 million and $5.5 million were paid to noncontrolling interest holders and redeemable noncontrolling interest holders, respectively.

HC2 received net proceeds of approximately $100.8 million.

At the time of the sale, the Company recorded a $39.3 million loss, inclusive of recognizing a $31.3 million loss from the realization of AOCI.

During the fourth quarter of 2020, the Company recognized a gain on sale of $2.4 million c noted above.

On October 30, 2019, the Company announced the sale of its stake in HMN, its 49% joint venture with Huawei Technologies Co., Ltd., to Hengtong Optic-Electric Co Ltd.

The sale valued HMN at $285.0 million, and GMH's 49% stake, through New Saxon, at approximately $140.0 million.

Under the terms of the Sale and Purchase Agreement, the sale of New Saxon’s 49% interest in HMN will be affected in two tranches.

The sale of the portion of New Saxon’s 30% interest of HMN, closed on May 12, 2020 (the "First HMN Close").

The remaining 19% interest of HMN is retained by New Saxon and subject to a put option agreement by New Saxon, exercisable starting on the second year anniversary of the closing date of the First HMN Close at a price equal to the greater of the share price paid for the 30% interest or fair market value as of the exercisable date.

In conjunction with the first tranche of the sale, the Company received $85.5 million in cash, of which $17.5 million and $2.1 million were paid to noncontrolling interest holders and redeemable noncontrolling interest holders, respectively.

New Saxon recorded a $71.1 million gain, included in Other income (loss) in the Condensed Consolidated Statements of Operations.

The gain recognized includes $11.3 million related to the fair value of the put option.

In addition, the Company recorded a $7.2 million tax expense related to a foreign tax payment when the first tranche closed.

The sale of ICS and its subsidiary, Go2 Tel, Inc., closed on October 31, 2020.

The Company recorded a $0.9 million gain on the sale.

Proceeds were used for general corporate purposes.

Infrastructure

Banker Steel Acquisition

On March 15, 2021, the Company announced that DBMG entered into an agreement to acquire 100% of Banker Steel Holdco LLC ("Banker Steel") for $145.0 million, which closed on May 27, 2021.

The acquisition was financed with $64.1 million from a partial draw on the new $110.0 million revolving credit facility, $49.6 million of sellers' notes, $6.3 million of assumed debt of Banker Steel, and $25.0 million in cash received from INNOVATE in the settlement of certain intercompany balances.

Banker Steel provides full-service fabricated structural steel and erection services primarily for the East Coast and Southeast commercial and industrial construction market, in addition to full design-assist services.

Banker Steel consists of six operating companies:

Banker Steel Co., LLC;

NYC Constructors, LLC;

Derr & Isbell Construction LLC;

Innovative detailing and Engineering Solutions;

and Lynchburg Freight and Specialty LLC.

The sale of CIG closed on July 1, 2021 to Continental General Holdings LLC, an entity controlled by Michael Gorzynski, a director of the Company and, as of December 31, 2021, a beneficial owner of approximately 6.6% of the Company's outstanding common stock who has also served as executive chairman of Continental since October 2020.

The Insurance segment, which primarily consisted of a closed block of long-term care insurance, had a book value, inclusive of intercompany eliminations, at the time of the sale of $544.0 million, inclusive of $344.0 million of Accumulated other comprehensive income ("AOCI").

The carrying value of the Insurance segment at the time of sale excluded cash of $62.5 million and investments of $26.7 million which were distributed to the Company through an extraordinary dividend immediately prior to the sale.

The extraordinary dividend was approved by our domestic regulator in connection with the approval of the sale.

The amount included in AOCI was reversed from equity at the time of the sale and offset the loss recognized.

While several factors impacted the fair value of the Insurance segment at the end of 2019, following discussions with our domestic regulator, changes in the asset management fee arrangement and expectations of future dividends primarily and ultimately resulted in the full impairment of the goodwill associated with the Insurance segment during the year ended December 31, 2019.

While these factors did not have a major impact on the operations of the stand-alone business, they did have a significant impact on the economic benefit that could be realized by the Company.

As a result of the factors described above, combined with the risks associated with the long-term care insurance industry, the Company exited the segment and sold the business resulting in a $200.8 million loss on the sale of CIG.

Sale of Beyond6

On December 31, 2020, the Company announced a plan to sell Beyond6 to an affiliate of Mercuria Investments US, Inc., pursuant to an Agreement and Plan of Merger ( the "Merger Agreement") among Beyond6, Greenfill, Inc., a Delaware Corporation ("Parent"), Greenfill Merger Inc., a newly-formed Delaware corporation and wholly-owned subsidiary of the Parent, and an affiliate of HC2 as the Stockholder Representative for the Beyond6 stockholders.

On December 31, 2020, the Company announced a plan to sell Beyond6 to an affiliate of Mercuria Investments US, Inc., pursuant to an Agreement and Plan of Merger (the "Merger Agreement") among Beyond6, Greenfill, Inc., a Delaware Corporation ("Parent"), Greenfill Merger Inc., a newly-formed Delaware corporation and wholly-owned subsidiary of Parent, and an affiliate of INNOVATE as the Stockholder Representative for the Beyond6 stockholders.

The sale closed on January 15, 2021.

During the first quarter of 2021, the Company recognized a $39.2 million gain on the sale.

During the third quarter of 2021, as a result of releases of related escrows and hold backs, the Company recognized an additional $0.5 million gain on the sale.

Debt Obligations

In February 2020, Spectrum amended its agreement governing its privately placed note funded by MSD Partners, L.P., increasing the principal balance to $39.3 million.

The proceeds were used to repay principal and interest on existing debt.

In August 2020, Spectrum modified its agreement with MSD Partners, L.P.

and Great American Life Insurance Company to extend the maturity on its privately placed notes to October 2021.

In September 2020, Spectrum amended its agreement governing its privately placed note funded by MSD Partners, L.P., increasing the principal balance by $4.0 million to $43.3 million.

The proceeds were used to repay principal and interest on existing debt and for general business purposes.

In November 2020, Spectrum paid down $2.9 million of its 8.50% Note due 2021 and $3.0 million on other various notes.

In December 2020, Spectrum paid down $21.0 million and $9.6 million of its 8.5% Note due 2021 and 10.5% Note due 2021, respectively.

Non-Operating Corporate

In March 2020, with the cash proceeds from the sale of GMSL, HC2 fully repaid its $15.0 million secured revolving line of credit with MSD PCOF Partners IX, LLC (the "2019 Revolving Credit Agreement").

HC2 recognized $0.4 million in extinguishment loss related to the repayment of the 2019 Revolving Credit Agreement, which is included in Loss on early extinguishment or restructuring of debt in our Consolidated Statement of Operations.

In March 2020, HC2 entered into a new $15.0 million secured revolving credit agreement (the “2020 Revolving Credit Agreement”).

The 2020 Revolving Credit Agreement matures in September 2021.

Loans under the 2020 Revolving Credit Agreement bear interest at a per annum rate equal to, at HC2's option, one, two or three month LIBOR plus a margin of 6.75%.

In April and May 2020, HC2 drew $10.0 million and $5.0 million of the 2020 Revolving Credit Agreement, respectively.

The Company used the proceeds for general corporate purposes.

In March 2020, with the cash proceeds from the sale of GMSL, HC2 redeemed $76.9 million of its 11.50% senior secured notes due 2021 (the "Senior Secured Notes") at a price equal to 104.5% of the principal amount plus accrued interest through the redemption date.

HC2 recognized $5.4 million in extinguishment loss related to the redemption of its Senior Secured Notes, which is included in Loss on early extinguishment or restructuring of debt in our Consolidated Statement of Operations.

In June 2020, with the cash proceeds from the partial sale of New Saxon's interest in HMN, HC2 redeemed $50.6 million of its Senior Secured Notes at a price equal to 104.5% of the principal amount plus accrued interest through the redemption date.

HC2 recognized $3.4 million in extinguishment loss related to the this redemption, which is included in Loss on early extinguishment or restructuring of debt in our Consolidated Statement of Operations.

In October 2020, HC2 redeemed an additional $2.1 million of its Senior Secured Notes at a price equal to 104.5% of the principal amount plus accrued interest through the redemption date.

HC2 recognized $0.1 million in extinguishment loss related to the this redemption, which is included in Loss on early extinguishment or restructuring of debt in our Consolidated Statement of Operations.

In April 2020, R2 received $10.0 million in funding from Huadong Medicine Company Limited as part of Huadong's $30 million Series B equity investment in R2.

These funds are being used to commercialize R2's CryoAesthetic technology which provides physicians a new way to lighten, brighten and rejuvenate skin.

This investment represents the second tranche of Huadong's investment at an approximate post-money valuation of $90.0 million and reduces Pansend's ownership by 7.8% to 56.1%.

On February 1, 2021, the Company repaid its 11.50% senior secured notes due 2021 (the "2021 Senior Secured Notes"), and issued $330.0 million aggregate principal amount of 8.50% senior secured notes due 2026 (the "2026 Senior Secured Notes").

In addition, the Company entered into exchange agreements with certain holders of approximately $51.8 million aggregate principal amount of its existing $55.0 million 7.50% convertible senior notes due 2022 (the "2022 Convertible Notes"), pursuant to which the Company exchanged such holders' 2022 Convertible Notes for newly issued convertible notes due 2026 (the "2026 Convertible Notes").

The 2026 Senior Secured Notes were issued in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended.

On February 23, 2021, the Company entered into a third amendment for the line of credit with MSD PCOF Partners IX, LLC ("Revolving Credit Agreement"), increasing the aggregate principal amount to $20.0 million and extending the maturity to February 23, 2024.

In May 2021, the Company drew $5.0 million under the Revolving Credit Agreement.

The Company used the proceeds to fund the redemption of the Company's Series A and A-2 Preferred Stock.

On July 1, 2021, CGI exchanged their Series A and Series A-2 Preferred Stock for new classes of Series A-3 and A-4 Preferred Stock with an extended maturity of July 1, 2026, with other terms substantially unchanged.

On August 30, 2021, HC2 Broadcasting Holdings Inc.

(“Broadcasting”) repurchased $1.0 million of DTV America Corporation's ("DTV") outstanding notes payable to certain institutional investors, of which the debt is now eliminated in consolidation.

Also on August 30, 2021, DTV extended its remaining outstanding notes by 60 days.

On October 21, 2021, Broadcasting entered into the Fifth Omnibus Amendment to Secured Notes, Consent and Second Amendment to Asset Sale Under Secured Notes and Intercreditor Agreement (the “Amendment”), which, among other things, extended $52.2 million of its Senior Secured Notes, due October 21, 2021, through November 30, 2022.

In addition, Broadcasting completed the last of a series of repurchases of all the outstanding secured and convertible promissory notes, inclusive of accrued interest, of DTV using a combination of cash on hand and proceeds from the sales on non-core assets.

On February 3, 2021, the Company announced that R2 received $10.0 million in funding from Huadong Medicine Company Limited (“Huadong”), a leading publicly traded Chinese pharmaceutical company.

Huadong’s investment will be used to fund the launch of R2 Technologies’ first-to-market innovations, Glacial Rx and Glacial Spa.

As part of its equity investment in R2, Huadong receives exclusive distribution rights for R2’s products in the China and selected Asia-Pacific markets.

On July 21, 2021, the Company provided an additional $15.0 million in Series C funding to R2 at a post-money valuation of $150.0 million.

The investment was made through the Company’s Life Sciences subsidiary, Pansend Life Sciences, LLC.

Stockholders' Rights Agreement

On August 30, 2021, the Company entered into a Tax Benefits Preservation Plan (the "Plan").

The Plan is intended to help protect the Company's ability to use its tax net operating losses and other certain tax assets ("Tax Benefits") by deterring an "ownership change," as defined under Section 382 of the Internal Revenue Code of 1986, as amended, and the Treasury Regulations thereunder (the "Code"), by a person or group of affiliated or associated persons from acquiring beneficial ownership of 4.9% or more of the outstanding common shares.

Equity for further information.

Financial Presentation Background

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$ 1,159.7 $ 676.6 $ 483.1

Life Sciences 3.5 — 3.5

Spectrum 42.0 40.3 1.7

Insurance 300.2 331.6 (31.4)

Other — 0.5 (0.5)

Eliminations (1)

(11.3) (10.2) (1.1)

Total net revenue 1,005.8 1,077.0 (71.2)

(Loss) income from operations

Total revenue 1,205.2 716.9 488.3

Income (loss) from operations

Infrastructure

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Spectrum (0.8) (2.2) 1.4

Insurance 35.6 37.3 (1.7)

Other (2.0) (2.7) 0.7

Non-operating Corporate (23.1) (27.0) 3.9

Eliminations (1)

(11.3) (10.2) (1.1)

Total (loss) income from operations (4.1) 25.3 (29.4)

Total loss from operations (10.6) (28.3) 17.7

Interest expense (59.1) (74.8) 15.7

Loss on early extinguishment or restructuring of debt (12.5) (9.4) (3.1)

(Loss) income from equity investees (3.4) 1.6 (5.0)

Gain on bargain purchase — 1.1 (1.1)

Loss from equity investees (2.8) (3.4) 0.6

Other income 4.3 69.2 (64.9)

Loss from continuing operations (80.7) (46.7) (34.0)

Income tax benefit (expense) (10.5) 19.6 (30.1)

Income tax expense (5.6) (7.0) 1.4

Loss from continuing operations (86.3) (53.7) (32.6)

Loss from discontinued operations (including loss on disposal of $44.2 million) (63.8) (13.9) (49.9)

Loss from discontinued operations (including loss on sale of $159.9 million and $44.1 million for the years ended December 31, 2021 and 2020, respectively) (149.9) (48.4) (101.5)

Net loss (236.2) (102.1) (134.1)

Net loss attributable to noncontrolling interest and redeemable noncontrolling interest 8.7 10.1 (1.4)

Net loss attributable to HC2 Holdings, Inc.

Net loss attributable to INNOVATE Corp.

(227.5) (92.0) (135.5)

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Net loss attributable to common stock and participating preferred stockholders $ (229.7) $ (95.6) $ (134.1)

(1) The Insurance segment revenues are inclusive of realized and unrealized gains and net investment income for the year ended December 31, 2020 and 2019, which are related to transactions between entities under common control which are eliminated or are reclassified in consolidation.

Net revenue :

Net revenue for the year ended December 31, 2020 decreased $71.2 million to $1,005.8 million from $1,077.0 million for the year ended December 31, 2019.

The decrease in revenue was driven by our Infrastructure segment, primarily driven by lower revenues from our structural steel fabrication and erection business, and our Insurance segment, net of eliminations, largely driven by lower net investment income and unfavorable market movements in values for common and preferred stock holdings and fixed maturity impairments.

(Loss) income from operations :

(Loss) income from operations for the year ended December 31, 2020 decreased $29.4 million to a loss of $4.1 million from income of $25.3 million for the year ended December 31, 2019.

The decrease is attributable to our Infrastructure segment due to lower revenues from our structural steel fabrication and erection business and our Life Sciences segment driven by R2, which increased spending in the current period to support commercialization efforts and further develop its product platform.

This was partially offset by a decrease in loss at our Spectrum segment related to cost reductions at Network and gains recognized on the sale of broadcast stations in the current period.

Revenue for the year ended December 31, 2021 increased $488.3 million to $1,205.2 million from $716.9 million for the year ended December 31, 2020.

The increase in revenue was primarily due to the Infrastructure segment, which acquired Banker Steel in the second quarter of 2021, and increases in Infrastructure market demand along with larger projects entering the market.

Income (loss) from operations :

Loss from operations for the year ended December 31, 2021 decreased $17.7 million to $10.6 million from a loss of $28.3 million for the year ended December 31, 2020.

The decrease in loss from operations was attributable to the Infrastructure segment as a result of the contribution from Banker Steel, which was acquired in the second quarter of 2021 and Non-operating Corporate, driven by non-recurring costs related to the 2020 proxy contest along with additional cost saving measures, and from the Spectrum segment, driven by lower impairments, cost savings and revenue increases.

The decrease was partially offset by our Life Sciences segment driven by R2, which increased spending during 2021 to support commercialization efforts, further develop its product platform and build out its sales team.

Interest expense :

Interest expense for the year ended December 31, 2020 increased $3.3 million to $79.4 million from $76.1 million for the year ended December 31, 2019.

The increase was attributable to an increase in the aggregate principal amount of debt at our Spectrum segment.

Interest expense for the year ended December 31, 2021 decreased $15.7 million to $59.1 million from $74.8 million for the year ended December 31, 2020.

The decrease was primarily attributable to Non-Corporate's refinancing of the 2021 Senior Secured Notes in the first quarter of 2021 and Spectrum's reduction in debt during the fourth quarter of 2020, which decreased interest expense in 2021.

Loss on early extinguishment or restructuring of debt :

Loss on early extinguishment or restructuring of debt for the year ended December 31, 2020 was $9.4 million.

This was driven by the write-off of deferred financing costs and original issuance discount related to the $15.0 million pay down of the 2019 Revolving Credit Agreement and the $129.5 million of redemptions of the Senior Secured Notes during 2020.

(Loss) income from equity investees:

(Loss) income from equity investees for the year ended December 31, 2020 decreased $5.0 million to a loss of $3.4 million from income of $1.6 million for the year ended December 31, 2019.

The decrease was driven by a decrease in income for the HMN investment, driven by the timing of turnkey project work and the reduction of ownership from 49% to 19% during 2020, and an increase in losses recorded from our investment in MediBeacon due to the timing of clinical trials.

Gain on bargain purchase:

Gain on bargain purchase for the year ended December 31, 2020 decreased $1.1 million to zero from $1.1 million for the year ended December 31, 2019.

The change relates to a gain recognized in 2019 due to a purchase price allocation adjustment related to the Insurance segment's acquisition of KIC in 2018.

Loss on early extinguishment or restructuring of debt for the year ended December 31, 2021 increased $3.1 million to $12.5 million from $9.4 million for the year ended December 31, 2020.

This was driven by the write-off of deferred financing costs and original issuance discount related to the refinancing of the 2021 Senior Secured Notes and the 2022 Convertible Notes in the first quarter of 2021 along with the refinancing of Infrastructure debt in conjunction with the Banker Steel acquisition in the second quarter of 2021, and was partially offset by the partial pay down of the 2021 Senior Secured Notes in 2020.

Loss from equity investees:

Loss from equity investees for the year ended December 31, 2021 decreased $0.6 million to $2.8 million from $3.4 million for the year ended December 31, 2020.

The decrease in loss was driven by increase in the equity income in HMN Technologies Co., Ltd.

("HMN"), which produced higher profits in 2021 as compared to 2020, which was generally attributable to the timing of turnkey project work.

This was partially offset by increases in losses recorded from our investment in MediBeacon due to the timing of clinical trials and due to the reduction in ownership in the HMN investment from 49% to 19% in the second quarter of 2020.

Other income:

Other income for the year ended December 31, 2020 increased $62.2 million to $68.5 million from $6.3 million for the year ended December 31, 2019.

The increase was primarily driven by the gain recognized on the partial HMN Sale, which closed during the second quarter of 2020.

Income tax benefit (expense) :

Income tax benefit (expense) was an expense of $10.5 million and a benefit of $19.6 million for the year ended December 31, 2020 and 2019, respectively.

The income tax expense recorded for the year ended December 31, 2020 primarily relates to tax expense incurred in China from the partial sale of HMN and the tax expense as calculated under ASC 740 for taxpaying entities, offset by a tax benefit from the carryback of net operating losses at the Insurance segment as a result of the enactment of the CARES Act in the first quarter of 2020.

Additionally, the tax benefits associated with losses generated by the HC2 Holdings, Inc.

tax consolidated group and certain other businesses have been reduced by a full valuation allowance as we do not believe it is more-likely-than-not that the losses will be utilized.

The income tax benefit recorded for the year ended December 31, 2019 was $19.6 million.

The benefit was primarily driven by a net valuation allowance release of $37.4 million related to the Insurance segment partially offset by an impairment of goodwill which is not deductible for tax purposes.

Preferred dividends, deemed dividends, and repurchase gains:

Preferred dividends, and deemed dividends, and repurchase gains for the year ended December 31, 2020 was $3.6 million compared to zero for the year ended December 31, 2019.

The decrease was largely driven by the issuance of Series B Non-Voting participating Convertible Preferred Shares (the "Series B Preferred Stock") in September and November 2020, which were issued with a $2.0 million Beneficial Conversion feature.

In addition, in the prior year, the Insurance segment purchased 10,000 shares of the Company's Series A-2 Preferred Stock at a $1.7 million discount.

Other income for the year ended December 31, 2021 decreased $64.9 million to $4.3 million from $69.2 million for the year ended December 31, 2020.

The decrease was predominantly driven by the gain on the sale of a portion of HMN in the comparable period, which closed during the second quarter of 2020.

Income tax expense :

Income tax expense was an expense of $5.6 million and $7.0 million for the years ended December 31, 2021 and 2020, respectively.

The income tax expense recorded for the year ended December 31, 2021 primarily relates to the tax expense as calculated under ASC 740 for taxpaying entities.

The income tax expense for the year ended December 31, 2020 primarily relates to tax expense incurred in China from the partial sale of HMN and the tax expense as calculated under ASC 740 for taxpaying entities which was mostly offset by a tax benefit from the carryback of net operating losses at the Insurance segment as a result of the enactment of the Coronavirus Aid, Relief, and Economic Security Act.

Segment Results of Operations

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2021 2020 Increase / (Decrease)

Net revenue $ 676.6 $ 713.3 $ (36.7)

Revenue $ 1,159.7 $ 676.6 $ 483.1

Cost of revenue 1,001.6 566.2 435.4

1 unchanged sentence

Depreciation and amortization 19.1 10.7 8.4

Other operating (income) expense 0.1 0.6 (0.5)

Other operating expense 0.3 0.1 0.2

Income from operations $ 35.2 $ 20.5 $ 14.7

Net revenue from our Infrastructure segment for the year ended December 31, 2020 decreased $36.7 million to $676.6 million from $713.3 million for the year ended December 31, 2019.

The decrease was primarily driven by lower revenues from our structural steel fabrication and erection business, which had increased activity in the comparable period on certain large commercial construction projects that are now at or near completion, as well as a decrease in power and industrial maintenance and repair work performed.

Revenue from our Infrastructure segment for the year ended December 31, 2021 increased $483.1 million to $1,159.7 million from $676.6 million for the year ended December 31, 2020.

The increase was primarily driven by DBMG’s acquisition of Banker Steel, which was acquired in the second quarter of 2021 and contributed an incremental $265.9 million of revenue as well as an increase from all legacy businesses, in each case driven by timing of project work under execution and changes in backlog mix.

Cost of revenue:

Cost of revenue from our Infrastructure segment for the year ended December 31, 2020 decreased $6.1 million to $566.2 million from $572.3 million for the year ended December 31, 2019.

The decrease was primarily driven by the timing of project work under execution and change in backlog mix, including a reduction in large commercial construction projects in the current period.

The decrease was partially offset by higher costs incurred in response to the COVID-19 pandemic.

Cost of revenue from our Infrastructure segment for the year ended December 31, 2021 increased $435.4 million to $1,001.6 million from $566.2 million for the year ended December 31, 2020.

The increase was primarily driven by DBMG’s acquisition of Banker Steel, which was acquired in the second quarter of 2021 and contributed an incremental cost of revenue of $220.8 million for the year ended December 31, 2021, as well as increases in market demand, larger projects entering the market which was offset in part by market pressure on point-of-sale project margins across all business lines, and most significantly in our industrials business.

Selling, general and administrative:

Selling, general and administrative expenses from our Infrastructure segment for the year ended December 31, 2020 decreased $0.7 million to $79.1 million from $79.8 million for the year ended December 31, 2019.

The decrease was primarily driven by lower travel expenses and acquisition related costs in the current period, partially offset by higher costs incurred due to an increase in salaries and wages

Selling, general and administrative expense from our Infrastructure segment for the year ended December 31, 2021 increased $24.4 million to $103.5 million from $79.1 million for the year ended December 31, 2020.

The increases were primarily driven by the acquisition of Banker Steel, which was acquired in the second quarter of 2021 and contributed an incremental $20.2 million of selling, general and administrative expenses, as well as increases in professional fees, consulting fees, travel, and meals and entertainment.

Depreciation and amortization:

Depreciation and amortization from our Infrastructure segment for the year ended December 31, 2020 decreased $4.8 million to $10.7 million from $15.5 million for the year ended December 31, 2019.

The decrease was primarily related to the full depreciation and amortization of assets that took place subsequent to the comparable period.

Other operating (income) expense:

Other operating (income) expense from our Infrastructure segment for the year ended December 31, 2020 decreased by $0.5 million to a loss of $0.1 million from income of $0.6 million for the year ended December 31, 2019.

The change was primarily due to the gains and losses on the sale of land and assets in the comparable periods.

Depreciation and amortization from our Infrastructure segment for the year ended December 31, 2021 increased $8.4 million to $19.1 million from $10.7 million for the year ended December 31, 2020.

The increase was largely due to the additional amortization and depreciation of assets obtained in the acquisition of Banker Steel in the second quarter of 2021, which contributed an additional $9.1 million of depreciation and amortization expense in 2021.

The increase was partially offset by reductions in depreciation and amortization as a result of fully depreciating certain assets in 2020.

Life Sciences Segment

1 unchanged sentence

2021 2020 Increase / (Decrease)

Revenue $ 3.5 $ — $ 3.5

Cost of revenue 2.5 — 2.5

Selling, general and administrative 20.7 16.7 4.0

2 unchanged sentences

Loss from operations $ (19.9) $ (16.9) $ (3.0)

Revenue from our Life Sciences segment for the year ended December 31, 2021 increased $3.5 million to $3.5 million from zero for the year ended December 31, 2020.

The increase in revenue was attributable to R2, which began the sale of its Glacial Rx products in 2021.

Cost of revenue :

Cost of revenue from our Life Sciences segment for the year ended December 31, 2021 increased $2.5 million to $2.5 million from zero for the year ended December 31, 2020.

The increase in cost of revenue was attributable to R2, which began the sale of its Glacial Rx products in 2021.

Selling, general and administrative :

Selling, general and administrative expenses from our Life Sciences segment for the year ended December 31, 2021 increased $4.0 million to $20.7 million from $16.7 million for the year ended December 31, 2020.

The increase was driven by higher expenses at R2, which increased spending from the comparable period to ramp up operations to support commercialization efforts and further develop its product platform.

The increase was driven by higher expenses at R2, which increased spending from the comparable period as a result of increased headcount across the organization, mainly to build out its sales team.

Spectrum Segment

Years Ended December 31,

2021 2020 Increase / (Decrease)

Net revenue $ 40.3 $ 41.8 $ (1.5)

Revenue $ 42.0 $ 40.3 $ 1.7

Cost of revenue 17.4 22.3 (4.9)

1 unchanged sentence

Depreciation and amortization 6.0 6.8 (0.8)

Other operating (income) expense (6.7) (3.0) (3.7)

Other operating expense (income) 0.3 (6.7) 7.0

Loss from operations $ (0.8) $ (2.2) $ 1.4

Net revenue from our Spectrum segment for the year ended December 31, 2020 decreased $1.5 million to $40.3 million from $41.8 million for the year ended December 31, 2019.

The decrease was primarily driven by a decrease in advertising revenues at the Azteca network driven by the negative impact of the COVID-19 pandemic, partially offset by higher station revenues as our Spectrum segment grew the number of operating stations and launched new customers across its broadcast platform.

Revenue from our Spectrum segment for the year ended December 31, 2021 increased $1.7 million to $42.0 million from $40.3 million for the year ended December 31, 2020.

The increase was primarily driven by higher station revenues, which can be attributed to the net expansion in our market coverage with new and existing customers and the greater number of OTA stations in operation.

This was partially offset by a decrease in revenue from the sale of non-core stations and a decrease in retransmission revenues.

Cost of revenue:

Cost of revenue from our Spectrum segment for the year ended December 31, 2021 decreased $4.9 million to $17.4 million from $22.3 million for the year ended December 31, 2020.

The decrease was primarily driven by cost reductions at Network, partially offset by increased cost of revenues associated with the higher number of operating stations.

Selling, general and administrative:

Selling, general and administrative expenses from our Spectrum segment for the year ended December 31, 2020 decreased $6.3 million to $20.1 million from $26.4 million for the year ended December 31, 2019.

The decrease was primarily due to lower compensation, overhead, and acquisition-related expenses.

Depreciation and amortization:

Depreciation and amortization from our Spectrum segment for the year ended December 31, 2020 increased $0.5 million to $6.8 million from $6.3 million for the year ended December 31, 2019.

The increase was driven by additional amortization of fixed assets at new stations which were acquired or built subsequent to the comparable period.

Other operating (income) expense :

Other operating (income) expense from our Spectrum segment for the year ended December 31, 2020 increased $3.7 million to income of $6.7 million from income of $3.0 million for the year ended December 31, 2019.

The increase was primarily due to gains recognized on the sale of stations in the current period, partially offset by the impairment of licenses in the current period and a decrease in gains from FCC reimbursements.

Insurance Segment

Years Ended December 31,

2020 2019 Increase / (Decrease)

Life, accident and health earned premiums, net $ 115.1 $ 116.8 $ (1.7)

Net investment income 198.8 212.9 (14.1)

Net realized and unrealized gains on investments (13.7) 1.9 (15.6)

Net revenue 300.2 331.6 (31.4)

Policy benefits, changes in reserves, and commissions 250.0 234.4 15.6

The overall decrease was primarily driven by targeted cost reductions at Network as a result of a decrease in audience measurement and programming costs as well as a reduction in operating expenses for certain non-core stations that were sold in the second half of 2020 and 2021.

Selling, general and administrative:

Depreciation and amortization (20.9) (23.1) 2.2

Other operating expense — 47.3 (47.3)

Income from operations (1)

$ 35.6 $ 37.3 $ (1.7)

(1) The Insurance segment revenues are inclusive of realized and unrealized gains and net investment income for the year ended December 31, 2020 and 2019.

Such adjustments are related to transactions between entities under common control which are eliminated or are reclassified in consolidation.

Life, accident and health earned premiums, net:

Life, accident and health earned premiums, net from our Insurance segment for the year ended December 31, 2020 decreased $1.7 million to $115.1 million from $116.8 million for the year ended December 31, 2019.

The decrease was primarily related to natural run-off of the closed blocks of business.

Net investment income:

Net investment income from our Insurance segment for the year ended December 31, 2020 decreased $14.1 million to $198.8 million from $212.9 million for the year ended December 31, 2019.

The decrease was primarily due to decreased holdings in equity, mortgage and short-term investments to pivot investment strategy to a more conservative methodology, including decreased yield on equity method investments, partially offset by an increase in investment income from higher average invested assets as a result of the reinvestment of premiums and investment income received.

Net realized and unrealized gains on investments:

Net realized and unrealized gains on investments from our Insurance segment for the year ended December 31, 2020 decreased $15.6 million to $13.7 million from $1.9 million for the year ended December 31, 2019.

The decrease was driven by unrealized losses due to unfavorable market movements in preferred investments, and realized losses on the sale of bond and equity investments.

Policy benefits, changes in reserves, and commissions :

Policy benefits, changes in reserves, and commissions from our Insurance segment for the year ended December 31, 2020 increased $15.6 million to $250.0 million from $234.4 million for the year ended December 31, 2019.The increase was due to unfavorable reserves development in the active life reserve for the LTC policies acquired in 2018 and expected increase in claims activity in the current period.

Selling, general and administrative expense from our Spectrum segment for the year ended December 31, 2021 decreased $1.0 million to $19.1 million from $20.1 million for the year ended December 31, 2020.

The overall decrease was primarily driven by decreased salary and benefits, office expenses, consulting fees and no terminated deal costs in the current year.

This was partially offset by severance expense incurred during the year and bonus expense in 2020 related to prior year.

Depreciation and amortization:

Depreciation and amortization from our Insurance segment for the year ended December 31, 2020 decreased $2.2 million to $20.9 million from $23.1 million for the year ended December 31, 2019.

The decrease was driven by a reduction in negative VOBA amortization largely due to lower policy terminations for the LTC policies acquired in 2018.

Other operating expense :

Other operating expense from our Insurance segment for the year ended December 31, 2020 was zero compared to $47.3 million for the year ended December 31, 2019.

The decrease was due to goodwill impairment in the comparable period not recognized in the current period.

Depreciation and amortization from our Spectrum segment for the year ended December 31, 2021 decreased $0.8 million to $6.0 million from $6.8 million for the year ended December 31, 2020.

The decrease in depreciation and amortization was primarily related to recent sales of non-core station assets.

Other operating expense (income) :

Other operating expense (income) from our Spectrum segment for the year ended December 31, 2021 decreased $7.0 million to expense of $0.3 million from income of $6.7 million for the year ended December 31, 2020.

The decrease in other operating expense (income) was primarily related to gains recognized on the sale of stations in 2020 and a reduction in FCC reimbursements during 2021.

This was partially offset by fewer asset impairments during 2021.

Non-operating Corporate

5 unchanged sentences

Selling, general and administrative :

Selling, general and administrative expenses from our Non-operating Corporate segment for the year ended December 31, 2020 increased $2.0 million to $26.9 million from $24.9 million for the year ended December 31, 2019.

The increase was driven by costs incurred associated with the proxy contest, acquisition and disposition costs, and increased legal activity.

This was partially offset by a decrease in bonus, stock compensation expense, rent expense and various consulting expenses in the current period.

Selling, general and administrative expenses from our Non-operating Corporate segment for the year ended December 31, 2021 decreased $3.9 million to $23.0 million from $26.9 million for the year ended December 31, 2020.

The decrease was driven by non-recurring costs related to the proxy contest in 2020 as well as decreases in stock compensation expense, rent expense and various consulting expenses in 2021, partially offset by additional expenses incurred in relation to the settlement with the Company's former CEO, increased discretionary bonus, and legal expenses.

(Loss) Income from Equity Investees

3 unchanged sentences

Other 5.3 2.6 2.7

(Loss) income from equity investees $ (3.4) $ 1.6 $ (5.0)

Loss from equity investees $ (2.8) $ (3.4) $ 0.6

Life Sciences:

Loss from equity investees within our Life Sciences segment for the year ended December 31, 2021 increased $2.1 million to $8.1 million from $6.0 million for the year ended December 31, 2020.

The increase in loss was largely due to higher equity method losses recorded from our investment in MediBeacon due to the timing of clinical trials.

Income from equity investees within our Other segment for the year ended December 31, 2020 decreased $2.4 million to $2.6 million from $5.0 million for the year ended December 31, 2019.

The decrease was driven by the equity investment in HMN, as the joint venture produced lower profits than in the comparable period, which is generally attributable to timing of turnkey project work, and a reduction in ownership from 49% to 19% as a result of the partial sale of HC2's investment in the second quarter of 2020.

The increase in loss was largely due to higher equity method losses recorded from our investment in MediBeacon as they prepare for their pivotal study.

Income from equity investees within our Other segment for the year ended December 31, 2021 increased $2.7 million to $5.3 million from $2.6 million for the year ended December 31, 2020.

The increase was driven by the equity investment in HMN, which produced higher income 2021 as compared to 2020, which is generally attributable to the timing of project work, partially offset by a reduction in ownership from 49% to 19% as a result of the partial sale of INNOVATE's investment in the second quarter of 2020.

Non-GAAP Financial Measures and Other Information

12 unchanged sentences

Adjusted EBITDA excludes the results of operations and any consolidating eliminations of our Insurance segment.

The calculation of Adjusted EBITDA, as defined by us, consists of Net income (loss) as adjusted for depreciation and amortization;

amortization of equity method fair value adjustments at acquisition;

Other operating (income) expense, which is inclusive of (gain) loss on sale or disposal of assets, lease termination costs, and FCC reimbursements;

asset impairment expense, interest expense;

net gain (loss) on contingent consideration;

loss on early extinguishment or restructuring of debt;

gain (loss) on sale of subsidiaries;

The calculation of Adjusted EBITDA, as defined by us, consists of Net income (loss) as adjusted for discontinued operations;

depreciation and amortization;

Other operating (income) expense, which is inclusive of (gain) loss on sale or disposal of assets, lease termination costs, asset impairment expense and FCC reimbursements;

interest expense;

other (income) expense, net;

foreign currency transaction (gain) loss included in cost of revenue;

loss on early extinguishment or restructuring of debt;

income tax (benefit) expense;

2 unchanged sentences

share-based compensation expense;

discontinued operations;

non-recurring items;

3 unchanged sentences

Infrastructure

Life Sciences Spectrum Other and Elimination Non-operating Corporate HC2

Net loss attributable to HC2 Holdings, Inc.

Net Income attributable to HC2 Holdings Insurance segment 40.2

Consolidating eliminations attributable to HC2 Holdings Insurance segment (6.0)

Net Income (loss) attributable to HC2 Holdings, Inc., excluding Insurance segment $ 6.8 $ (14.4) $ (17.5) $ (1.5) $ (99.6) $ (126.2)

Life Sciences Spectrum Non-operating Corporate Other and Eliminations INNOVATE

Net (loss) attributable to INNOVATE Corp.

Discontinued operations (149.9)

Net Income (loss) attributable to INNOVATE Corp., excluding discontinued operations $ 16.9 $ (19.8) $ (12.9) $ (64.2) $ 2.4 $ (77.6)

Adjustments to reconcile net income (loss) to Adjusted EBITDA:

1 unchanged sentence

Depreciation and amortization (included in cost of revenue) 12.2 — — — — 12.2

Other operating (income) expenses 0.1 0.1 (6.7) — — (6.5)

Other operating expenses 0.4 — 0.2 — — 0.6

Interest expense 8.5 — 9.2 41.4 — 59.1

Other (income) expense, net (4.0) — 3.9 (4.2) — (4.3)

Loss on early extinguishment of debt — — — — 9.4 9.4

Income tax expense 4.2 — 0.3 11.0 0.2 15.7

Loss on early extinguishment or restructuring of debt 1.5 — 1.0 10.0 — 12.5

Income tax expense (benefit) 10.5 — 0.3 (6.1) 0.9 5.6

Noncontrolling interest 1.8 (8.2) (2.3) — — (8.7)

Discontinued operations — — — 61.7 3.9 65.6

Bonus to be settled in equity — — — — (0.5) (0.5)

Share-based payment expense — 0.2 0.3 — 2.4 2.9

Non-recurring items 2.7 — — — 5.4 8.1

Share-based compensation expense — 0.2 0.6 1.6 — 2.4

Nonrecurring items 0.5 — — 0.5 — 1.0

COVID-19 costs 8.6 — — — — 8.6

3 unchanged sentences

Infrastructure

Life Sciences Spectrum Other and Elimination Non-operating Corporate HC2

Net loss attributable to HC2 Holdings, Inc.

Net Income attributable to HC2 Holdings Insurance segment 59.4

Consolidating eliminations attributable to HC2 Holdings Insurance segment (8.7)

Net Income (loss) attributable to HC2 Holdings, Inc., excluding Insurance Segment $ 24.7 $ (0.2) $ (18.5) $ (0.6) $ (87.6) $ (82.2)

Life Sciences Spectrum Non-operating Corporate Other and Eliminations INNOVATE

Net (loss) attributable to INNOVATE Corp.

Discontinued operations (48.4)

Net Income (loss) attributable to INNOVATE Corp., excluding discontinued operations $ 6.8 $ (14.4) $ (13.8) $ (90.2) $ 68.0 $ (43.6)

Adjustments to reconcile net income (loss) to Adjusted EBITDA:

3 unchanged sentences

Interest expense 8.5 — 14.7 51.6 — 74.8

Loss on early extinguishment or restructuring of debt — — — 9.4 — 9.4

Other (income) expense, net 0.5 (2.3) 1.9 2.1 (71.3) (69.1)

Income tax (benefit) expense 10.9 — (1.5) — (8.1) 1.3

Income tax expense (benefit) 4.2 — 0.3 0.2 2.3 7.0

Noncontrolling interest 0.6 (6.2) (5.3) — 0.8 (10.1)

Share-based payment expense — 0.1 0.6 — 5.5 6.2

Discontinued Operations — — — 3.5 11.0 14.5

Bonus to be settled in equity — — — (0.5) — (0.5)

Share-based compensation expense — 0.2 0.3 2.4 — 2.9

Nonrecurring items 2.7 — — 5.4 — 8.1

COVID-19 costs 19.4 — — — — 19.4

Acquisition and disposition costs 0.6 — 0.5 3.9 1.8 6.8

1 unchanged sentence

Infrastructure:

Net income from our Infrastructure segment for the year ended December 31, 2020 decreased $17.9 million to $6.8 million from $24.7 million for the year ended December 31, 2019.

Adjusted EBITDA from our Infrastructure segment for the year ended December 31, 2020 decreased $12.5 million to $63.2 million from $75.7 million for the year ended December 31, 2019.

The decrease in Adjusted EBITDA can be attributed to the timing of project work under execution and change in backlog mix, including a reduction in large commercial construction projects in the current period, as well as a decline in power and industrial repair and maintenance work performed.

Net income from our Infrastructure segment for the year ended December 31, 2021 increased $10.1 million to $16.9 million from $6.8 million for the year ended December 31, 2020.

Adjusted EBITDA from our Infrastructure segment for the year ended December 31, 2021 increased $15.2 million to $78.4 million from $63.2 million for the year ended December 31, 2020.

The increase in Adjusted EBITDA can be attributed to the contribution from Banker Steel, which was acquired in the second quarter of 2021.

The increase was partially offset by market pressure on point-of-sale project margins, primarily in the industrials business.

Life Sciences:

Net loss from our Life Sciences segment for the year ended December 31, 2020 decreased $14.2 million to $14.4 million from $0.2 million for the year ended December 31, 2019.

Net loss from our Life Sciences segment for the year ended December 31, 2021 increased $5.4 million to $19.8 million from $14.4 million for the year ended December 31, 2020.

Adjusted EBITDA loss from our Life Sciences segment for the year ended December 31, 2021 increased $5.1 million to $27.6 million from $22.5 million for the year ended December 31, 2020.

The increase in Adjusted EBITDA loss was primarily driven by higher expenses at R2, which increased spending from the comparable period to support commercialization efforts and further develop its product platform.

and higher equity method losses recorded from our investment in MediBeacon due to the timing of clinical trials.

The increase in Adjusted EBITDA loss was primarily driven by higher expenses at R2, which ramped-up operations to support the commercial launch of its Glacial Rx products, including notable increases in salaries and benefits from headcount additions, including increased commissions for product sales, as well as higher equity method losses recorded from our investment in MediBeacon as they prepare for their pivotal study.

Net loss from our Spectrum segment for the year ended December 31, 2021 decreased $0.9 million to $12.9 million from $13.8 million for the year ended December 31, 2020.

Adjusted EBITDA loss from our Spectrum segment for the year ended December 31, 2020 decreased $5.1 million to $1.2 million from $6.3 million for the year ended December 31, 2019.

The overall decrease in Adjusted EBITDA loss was primarily driven by a decrease in compensation and overhead, expenses, as well as higher station revenues as our Spectrum segment grew the number of operating stations and launched new customers across its broadcast platform.

This was partially offset by a decrease in advertising revenues at the Azteca network driven by the negative impact of the COVID-19 pandemic.

Other and Elimination:

Net income (loss) from our Other segment for the year ended December 31, 2020 decreased $0.9 million to income of $1.5 million from a loss of $0.6 million for the year ended December 31, 2019.

Adjusted EBITDA from our Other segment for the year ended December 31, 2020 decreased $2.1 million to $1.6 million from $3.7 million for the year ended December 31, 2019.

The decrease in Adjusted EBITDA for Other and Eliminations was driven by lower profits for the HMN investment, which is generally attributable to the timing of turnkey project work and the reduction of ownership from 49% to 19% as a result of the partial sale of HMN in the second quarter of 2020.

Adjusted EBITDA from our Spectrum segment for the year ended December 31, 2021 increased $8.1 million to income of $6.9 million from an Adjusted EBITDA loss of $1.2 million for the year ended December 31, 2020.

The overall increase in Adjusted EBITDA to income was primarily driven by higher station revenues as Station Group grew the number of operating stations and launched new customers across its broadcast platform, Network cost reductions, a decrease in compensation, rent, consulting and overhead expenses.

This was partially offset by severance expense incurred during the year and bonus expense in 2020 related to prior year.

Non-operating Corporate:

Net loss from our Non-operating Corporate segment for the year ended December 31, 2020 increased $12.0 million to $99.6 million from $87.6 million for the year ended December 31, 2019.

Adjusted EBITDA loss from our Non-operating Corporate segment for the year ended December 31, 2020 decreased $2.3 million to $15.6 million from $17.9 million for the year ended December 31, 2019.

The decrease in Adjusted EBITDA loss was driven by a decrease in discretionary bonus and a general reduction in overhead expenses, including professional fees, travel and entertainment expenses, and rent expense, partially offset by an increase in recurring legal fees resulting from an increase in activity.

Net loss from our Non-operating Corporate segment for the year ended December 31, 2021 decreased $26.0 million to $64.2 million from $90.2 million for the year ended December 31, 2020.

Adjusted EBITDA loss from our Non-operating Corporate segment for the year ended December 31, 2021 increased $2.4 million to $18.0 million from $15.6 million for the year ended December 31, 2020.

The increase in Adjusted EBITDA loss was driven by the settlement with the Company's former CEO, discretionary bonus, increases in severance, and legal fees resulting from an increase in activity in 2021.

The Company's remaining selling, general and administrative costs decreased due to lower salary and benefits, professional fees, travel and entertainment expenses, and rent expense.

Other and Eliminations:

Net income from our Other and Eliminations segment for the year ended December 31, 2021 decreased $65.6 million to $2.4 million from $68.0 million for the year ended December 31, 2020.

Adjusted EBITDA from our Other segment for the year ended December 31, 2021 increased $2.6 million to $4.2 million from $1.6 million for the year ended December 31, 2020.

The increase in Adjusted EBITDA for our Other and Eliminations segment was driven by the equity investment in HMN, as it produced higher income than in the comparable period, which is generally attributable to the timing of project work, partially offset by a reduction in ownership from 49% to 19% as a result of the partial sale of INNOVATE's investment in the second quarter of 2020.

(in millions):

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Spectrum 6.9 (1.2) 8.1

Other and Eliminations 1.6 3.7 (2.1)

Non-Operating Corporate (18.0) (15.6) (2.4)

Other and Eliminations 4.2 1.6 2.6

Adjusted EBITDA $ 43.9 $ 25.5 $ 18.4

Adjusted Operating Income - Insurance

Adjusted Operating Income ("Insurance AOI") and Pre-tax Adjusted Operating Income (“Pre-tax Insurance AOI”) for the Insurance segment are non-U.S.

GAAP financial measures frequently used throughout the insurance industry and are economic measures the Insurance segment uses to evaluate its financial performance.

Management believes that Insurance AOI and Pretax Insurance AOI measures provide investors with meaningful information for gaining an understanding of certain results and provide insight into an organization’s operating trends and facilitates comparisons between peer companies.

However, Insurance AOI and Pre-tax Insurance AOI have certain limitations, and we may not calculate it the same as other companies in our industry.

It should, therefore, be read together with the Company's results calculated in accordance with U.S.

Similarly to Adjusted EBITDA, using Insurance AOI and Pre-tax Insurance AOI as performance measures have inherent limitations as an analytical tool as compared to income (loss) from operations or other U.S.

GAAP financial measures, as these non-U.S.

GAAP measures exclude certain items, including items that are recurring in nature, which may be meaningful to investors.

As a result of the exclusions, Insurance AOI and Pre-tax Insurance AOI should not be considered in isolation and do not purport to be an alternative to income (loss) from operations or other U.S.

GAAP financial measures as measures of our operating performance.

Management defines Insurance AOI as Net income for the Insurance segment adjusted to exclude the impact of net investment gains (losses), including OTTI losses recognized in operations;

asset impairment;

intercompany elimination;

gain on bargain purchase, gain on reinsurance recaptures;

and acquisition costs.

Management defines Pre-tax Insurance AOI as Insurance AOI adjusted to exclude the impact of income tax (benefit) expense recognized during the current period.

Management believes that Insurance AOI and Pre-tax Insurance AOI provide meaningful financial metrics that help investors understand certain results and profitability.

While these adjustments are an integral part of the overall performance of the Insurance segment, market conditions impacting these items can overshadow the underlying performance of the business.

Accordingly, we believe using a measure which excludes their impact is effective in analyzing the trends of our operations.

The table below shows the adjustments made to the reported Net income (loss) of the Insurance segment to calculate Insurance AOI and Pre-tax Insurance AOI (in millions).

Refer to the analysis of the fluctuations within the results of operations section:

Year ended December 31,

2020 2019 Increase / (Decrease)

Net income - Insurance segment $ 40.2 $ 59.4 $ (19.2)

Effect of investment (gains) (1)

13.6 (1.9) 15.5

Asset impairment expense — 47.3 (47.3)

Gain on bargain purchase — (1.1) 1.1

Acquisition costs 0.1 2.1 (2.0)

Insurance AOI 53.9 105.8 (51.9)

Income tax expense (benefit) (4.3) (20.1) 15.8

Pre-tax Insurance AOI $ 49.6 $ 85.7 $ (36.1)

(1) The Insurance segment revenues are inclusive of realized and unrealized gains and net investment income for the year ended December 31, 2020 and 2019.

Such adjustments are related to transactions between entities under common control which are eliminated or are reclassified in consolidation.

Net income for the year ended December 31, 2020 decreased $19.2 million to $40.2 million from $59.4 million for the year ended December 31, 2019.

Pre-tax Insurance AOI for the year ended December 31, 2020 decreased $36.1 million to $49.6 million from $85.7 million for year ended December 31, 2019.

The decrease was primarily driven by non-recurring favorable claims activity recognized in the comparable period and additional unfavorable claims activity and reserve developments in the current year.

Additionally, the Insurance segment had a reduction in net investment income due to lower bond yields and unfavorable market movements in values for preferred stock holdings and fixed maturity impairments and unfavorable VOBA amortization largely due to lower policy terminations for the LTC policies acquired in 2018.

Projects in backlog consist of awarded contracts, letters of intent, notices to proceed, change orders, and purchase orders obtained.

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Short- and Long-Term Liquidity Considerations and Risks

HC2 is a holding company and its liquidity needs are primarily for interest payments on its Senior Secured Notes, Convertible Notes, and its Revolving Credit Agreement (each as defined below), dividend payments on its Preferred Stock and recurring operational expenses.

Our Non-Operating Corporate segment consists of holding companies, and its liquidity needs are primarily for interest payments on its 2026 Senior Secured Notes, 2022 Convertible Notes and 2026 Convertible Notes, Revolving Credit Agreement, dividend payments on its Preferred Stock and recurring operational expenses.

As of December 31, 2021, the Company had $45.5 million of cash and cash equivalents compared to $43.8 million as of December 31, 2020.

On a stand-alone basis, as of December 31, 2020, HC2 had cash and cash equivalents of $27.5 million compared to $11.6 million at December 31, 2019.

At December 31, 2020, cash and cash equivalents in our Insurance segment was $188.5 million compared to $170.5 million at December 31, 2019.

Our subsidiaries' principal liquidity requirements arise from cash used in operating activities, debt service, and capital expenditures, including purchases of steel construction equipment, OTA broadcast station equipment, liabilities associated with insurance products, development of back-office systems, operating costs and expenses, and income taxes.

On a stand-alone basis, as of December 31, 2021, the Non-Operating Corporate segment had cash and cash equivalents of $22.0 million compared to $27.5 million at December 31, 2020.

Our subsidiaries' principal liquidity requirements arise from cash used in operating activities, debt service, and capital expenditures, including purchases of steel construction equipment, OTA broadcast station equipment, development of back-office systems, operating costs and expenses, and income taxes.

As of December 31, 2021, the Company had $630.8 million of indebtedness on a consolidated basis compared to $576.6 million as of December 31, 2020.

On a stand-alone basis, as of December 31, 2020 and December 31, 2019, HC2 had indebtedness of $410.4 million and $540.0 million, respectively.

HC2's stand-alone debt consists of the $340.4 million aggregate principal amount of 11.50% senior secured notes due 2021 (the "Senior Secured Notes"), the $55.0 million aggregate principal amount of 7.5% convertible senior notes due 2022 (the "Convertible Notes"), and the $15.0 million secured revolving credit agreement ("2020 Revolving Credit Agreement"), fully drawn.

HC2 is required to make semi-annual interest payments on its Senior Secured Notes and Convertible Notes, and quarterly interest payments on its 2020 Revolving Credit Agreement.

HC2 is required to make dividend payments on its outstanding Preferred Stock on January 15 th , April 15 th , July 15 th , and October 15 th of each year.

HC2 received $5.2 million in net management fees during the year ended December 31, 2020, related to fees earned in the fourth quarter of 2019 and the first three quarters of 2020.

HC2 received $18.0 million in dividends from its Infrastructure segment during the year ended December 31, 2020.

On a stand-alone basis, as of December 31, 2021 and December 31, 2020, INNOVATE had indebtedness of $390.0 million and $410.4 million, respectively.

INNOVATE's stand-alone debt consists of the $330.0 million aggregate principal amount of 2026 Senior Secured Notes, $3.2 million aggregate principal amount of 2022 Convertible Notes, and $51.8 million aggregate principal amount of 2026 Convertible Notes.

INNOVATE is required to make semi-annual interest payments on its 2026 Senior Secured Notes, 2022 Convertible Notes and 2026 Convertible Notes, and quarterly interest payments on its 2024 Revolving Credit Agreement.

INNOVATE received $4.5 million in dividends from its Infrastructure segment during the year ended December 31, 2021.

Under a tax sharing agreement, the Infrastructure segment reimburses INNOVATE for use of its net operating losses.

During the year ended December 31, 2021, INNOVATE received $5.8 million from its Infrastructure segment under this tax sharing agreement.

INNOVATE received $2.1 million in net management fees from Continental Insurance Group prior to its sale during the year ended December 31, 2021.

On May 29, 2021, pursuant to the Certificate of Designation, certain holders of the Series A and A-2 Preferred Stock caused the Company to redeem the Series A and A-2 Preferred Stock at the accrued value per share plus accrued but unpaid dividends (to the extent not included in the accrued value of Series A and A-2 Preferred Stock), of which $10.4 million was paid in cash to holders of the Series A and A-2 Preferred Stock.

Each share of Series A and A-2 Preferred Stock that was not so redeemed was automatically converted into shares of common stock at the conversion price then in effect, of which 50,410 shares of the Company's common stock were issued in lieu of cash to holders of the Series A Preferred Stock.

In connection with the Stock Purchase Agreement, CGI, formerly a wholly owned subsidiary of the Company, entered into a letter agreement with Continental General Holdings, LLC to not redeem at maturity or seek redemption of the $16.1 million Preferred Stock.

On July 1, 2021, CGI exchanged their Series A and Series A-2 Preferred Stock for new classes of Series A-3 and Series A-4 Preferred Stock with an extended maturity of July 1, 2026, with other terms substantially unchanged from the terms of the Series A and Series A-2 Preferred Stock.

INNOVATE is required to make dividend payments on its outstanding Preferred Stock on January 15 th , April 15 th , July 15 th , and October 15 th of each year.

We have financed our growth and operations to date, and expect to finance our future growth and operations, through public offerings and private placements of debt and equity securities, credit facilities, vendor financing, capital lease financing and other financing arrangements, as well as cash generated from the operations of our subsidiaries.

In the future, we may also choose to sell assets or certain investments to generate cash.

At this time, we believe that we will be able to continue to meet our liquidity requirements and fund our fixed obligations (such as debt service and operating leases) and other cash needs for our operations for at least the next twelve months through a combination of cash on hand, distributions from our subsidiaries, and/or the sale of assets and certain investments.

Historically, we have chosen to reinvest cash and receivables into the growth of our various businesses, and therefore have not kept a large amount of cash on hand at the holding company level.

The ability of HC2’s subsidiaries to make distributions to HC2 is subject to numerous factors, including restrictions contained in each subsidiary’s financing agreements, regulatory requirements, availability of sufficient funds at each subsidiary and the approval of such payment by each subsidiary’s board of directors, which must consider various factors, including general economic and business conditions, tax considerations, strategic plans, financial results and condition, expansion plans, any contractual, legal or regulatory restrictions on the payment of dividends, and such other factors each subsidiary’s board of directors considers relevant.

Our ability to sell assets and certain of our investments to meet our existing financing needs may also be limited by our existing financing instruments.

Although the Company believes that it will be able to raise additional equity capital, refinance or renegotiate terms of our indebtedness or preferred stock, enter into other financing arrangements or engage in asset sales and sales of certain investments sufficient to fund any cash needs that we are not able to satisfy with the funds expected to be provided by our subsidiaries, there can be no assurance that it will be able to do so on terms satisfactory to the Company if at all.

At this time, we believe that we will be able to continue to meet our liquidity requirements and fund our fixed obligations (such as debt service and operating leases) and other cash needs for our operations for at least the next twelve months from the issuance of the Consolidated Financial Statements through a combination of available cash and distributions from our subsidiaries.

The ability of INNOVATE’s subsidiaries to make distributions to INNOVATE is subject to numerous factors, including restrictions contained in each subsidiary’s financing agreements, regulatory requirements, availability of sufficient funds at each subsidiary and the approval of such payment by each subsidiary’s board of directors, which must consider various factors, including general economic and business conditions, tax considerations, strategic plans, financial results and condition, expansion plans, any contractual, legal or regulatory restrictions on the payment of dividends, and such other factors each subsidiary’s board of directors considers relevant.

Although the Company believes, to the extent needed, that it will be able to raise additional equity capital, refinance indebtedness or preferred stock, enter into other financing arrangements or engage in asset sales and sales of certain investments sufficient to fund any cash needs that we are not able to satisfy with the funds on hand or expected to be provided by our subsidiaries, there can be no assurance that it will be able to do so on terms satisfactory to the Company, if at all.

Such financing options, if pursued, may also ultimately have the effect of negatively impacting our liquidity profile and prospects over the long-term.

Our ability to sell assets and certain of our investments to meet our existing financing needs may also be limited by our existing financing instruments.

In addition, the sale of assets or the Company’s investments may also make the Company less attractive to potential investors or future financing partners.

We have seen significant costs increases, primarily at our Infrastructure segment, driven by expenses associated with maintaining a safe work environment, and while executing on its projects.

During the year ended December 31, 2020, $19.4 million of COVID-19 costs were incurred.

Although the COVID-19 pandemic did not have a material impact on the HC2’s liquidity for the year ended December 31, 2020, management believes the continuation of the pandemic and its related effect on the U.S.

In September 2018, the Company entered into a 75-month lease for office space.

As part of the agreement, INNOVATE was able to pay a lower security deposit and lease payments, and received favorable lease terms as consideration for landlord required cross default language in the event of default of the shared space leased by Harbinger Capital Partners, formerly a related party, in the same building.

With the adoption of ASC 842, as of January 1, 2019, this lease was recognized as a right of use asset and lease liability on the Consolidated Balance Sheets.

In November 2021, the Company entered into a ten-year lease agreement for a special purpose space in West Palm Beach, Florida.

The new lease has not yet commenced, but will require future monthly lease payments of approximately $0.2 million over the entire lease term and yearly common area maintenance charges of $0.6 million, both of which are subject to a 3% annual upward adjustments, with total square footage of 20,950.

The new lease also provides for the Company to receive an allowance, from the Landlord, of $2.1 million to be used toward costs to design, engineer, install, supply and to construct improvements which is payable at the end of the lease.

The future lease payments and the allowance are not yet recorded on our consolidated balance sheet.

We expect the accounting lease commencement date for this initial portion of the lease for financial reporting purposes to begin no later than November 2023.

Also in November 2021, the Company entered into a three-year lease agreement for office space in West Palm Beach, Florida.

The lease commencement date was November 15, 2021, and requires monthly lease payments of approximately $12.5 thousand over the entire lease term, subject to a 3% annual upward adjustment, with total square footage of 2,723.

The future lease payments and corresponding right of use asset of $0.4 million were recorded on our consolidated balance sheet as a lease liability.

In December 2021, the Company entered into a five-year lease agreement with an option to extend the lease for another five years for office space in West Palm Beach, Florida.

The new lease has not commenced yet, but will require future monthly lease payments of approximately $0.14 million over the entire lease term, subject to a 3% annual upward adjustment, with total square footage of 15,786.

The future lease payments are not yet recorded on our consolidated balance sheet, as the building is still under construction.

We expect the accounting lease commencement date for this initial portion of the lease for financial reporting purposes to begin in the fourth quarter of 2023.

DBMG’s off-balance sheet arrangements at December 31, 2021 included letters of credit of $13.5 million under Credit and Security Agreements and performance bonds of $900.8 million.

DBMG’s contract arrangements with customers sometimes require DBMG to provide performance bonds to partially secure its obligations under its contracts.

Bonding requirements typically arise in connection with private contracts and sometimes with respect to certain public work projects.

DBMG’s performance bonds are obtained through surety companies and typically cover the entire project price.

COVID-19 Expenditures

We have seen significant cost increases, primarily at our Infrastructure segment, driven by expenses associated with maintaining a safe work environment, and while executing on its projects.

During the years ended December 31, 2021 and 2020, $8.6 million and $19.4 million of COVID-19 costs were incurred.

Although the COVID-19 pandemic did not have a material impact on INNOVATE’s liquidity for the year ended December 31, 2021, management believes the continuation of the pandemic and its related effect on the U.S.

and global economies could introduce added pressure on the Company’s liquidity position and financial performance.

Our sources of liquidity are primarily from the dividends and tax sharing agreement with DBMG, cash proceeds from completed and anticipated monetization’s and other arrangements.

Additionally, in response to the COVID-19 pandemic, our corporate staff is predominantly working remotely and many of our key vendors, and consultants have similarly begun to work remotely.

As a result of such remote work arrangements, certain operational, reporting, accounting and other processes may slow, which could result in longer time to execute critical business functions.

Capital Expenditures

Capital expenditures for the years ended December 31, 2020 and 2019 are set forth in the table below (in millions):

Capital expenditures for the periods ended December 31, 2021 and 2020 are set forth in the table below (in millions):

Years Ended December 31,

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Spectrum 5.3 11.8

Insurance 0.2 0.6

Non-operating Corporate — 0.2

Total $ 24.1 $ 17.8

Non-Operating Corporate

2026 Senior Secured Notes Terms and Conditions

The Secured Notes mature on December 1, 2021.

The Secured Notes accrue interest at a rate of 11.50% per year.

Interest on the Secured Notes is paid semi-annually on December 1 and June 1 of each year.

The 2026 Senior Secured Notes mature on February 1, 2026.

The 2026 Senior Secured Notes accrue interest at a rate of 8.50% per year.

Interest on the 2026 Senior Secured Notes is paid semi-annually on February 1 and August 1 of each year.

Issue Price .

The issue price of the Secured Notes was 98.75% of par.

The issue price of the 2026 Senior Secured Notes was 100% of par.

The notes and the note guarantees are the Company’s and certain of its direct and indirect domestic subsidiaries’ (the "Subsidiary Guarantors") general senior secured obligations.

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The notes and the note guarantees are secured on a first-priority basis by substantially all of the Company’s assets and the assets of the Subsidiary Guarantors, subject to certain exceptions and permitted liens.

The Secured Notes are secured by a first priority lien on substantially all of the Company’s assets (except for certain "Excluded Assets," and subject to certain "Permitted Liens," each as defined in the Secured Indenture), including, without limitation:

The 2026 Senior Secured Notes are secured by a first priority lien on substantially all of the Company’s assets (except for certain "Excluded Assets," and subject to certain "Permitted Liens," each as defined in the Secured Indenture), including, without limitation:

• all equity interests owned by the Company or a Subsidiary Guarantor (which, in the case of any equity interest in a foreign subsidiary, will be limited to 100% of the non-voting stock (if any) and 65% of the voting stock of such foreign subsidiary) and the related rights and privileges associated therewith (but excluding Equity Interests of Insurance Subsidiaries (as defined in the Secured Indenture), to the extent the pledge thereof is deemed a "change of control" under applicable insurance regulations);

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Events of Default .

The Secured Indenture contains customary events of default which could, subject to certain conditions, cause the Secured

Notes to become immediately due and payable.

The Secured Indenture contains customary events of default which could, subject to certain conditions, cause the 2026 Senior Secured Notes to become immediately due and payable.

2022 Convertible Notes Terms and Conditions

Certain terms and conditions of the Convertible Notes are as follows:

The 2022 Convertible Notes mature on June 1, 2022 unless earlier converted, redeemed or purchased.

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Optional Redemption .

The Company may not redeem the notes prior to June 1, 2020.

On or after June 1, 2020, the Company may redeem for cash all of the notes if the last reported sale price of the Company’s common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (which need not be consecutive trading days) during any 30 consecutive trading-day period ending within five trading days prior to the date on which the Company provides notice of redemption.

The Company could not redeem the notes prior to June 1, 2020.

From or after June 1, 2020, the Company may redeem for cash all of the notes if the last reported sale price of the Company’s common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (which need not be consecutive trading days) during any 30 consecutive trading-day period ending within five trading days prior to the date on which the Company provides notice of redemption.

The redemption price will equal 100% of the principal amount of the notes being redeemed, plus accrued and unpaid interest, including additional interest, if any, to, but excluding, the redemption date.

Conversion Rights .

The Convertible Notes are convertible into shares of the Company’s common stock based on an initial conversion rate of 228.3105 shares of common stock per $1,000 principal amount of Convertible Notes (equivalent to an initial conversion price of approximately $4.38 per share of the Company’s common stock), at any time prior to the close of business on the business day immediately preceding the maturity date, in principal amounts of $1,000 or an integral multiple of $1,000 in excess thereof.

The 2022 Convertible Notes are convertible into shares of the Company’s common stock based on a conversion rate of 234.2971 shares of common stock per $1,000 principal amount of Convertible Notes (equivalent to a conversion price of approximately $4.27 per share of the Company’s common stock), at any time prior to the close of business on the business day immediately preceding the maturity date, in principal amounts of $1,000 or an integral multiple of $1,000 in excess thereof.

In addition, following a Make-Whole Fundamental Change (as defined in the indenture governing the 2022 Convertible Notes) or the Company’s delivery of a notice of redemption for the 2022 Convertible Notes, the Company will, in certain circumstances, increase the conversion rate for a holder who elects to convert its 2022 Convertible Notes in connection with (i) such Make-Whole Fundamental Change or (ii) such notice of redemption.

However, to comply with certain listing standards of The New York Stock Exchange, the Company will settle in cash its obligation to increase the conversion rate in connection with a Make-Whole Fundamental Change or redemption until it has obtained the requisite stockholder approval.

Events of Default .

The indenture governing the 2022 Convertible Notes contains customary events of default which could, subject to certain conditions, cause the 2022 Convertible Notes to become immediately due and payable.

2026 Convertible Notes Terms and Conditions

The 2026 Convertible Notes mature on August 1, 2026 unless earlier converted, redeemed or purchased.

The 2026 Convertible Notes accrue interest at a rate of 7.5% per year.

Interest on the 2026 Convertible Notes is paid semi-annually on February 1 and August 1 of each year.

Issue Price .

The issue price of the 2026 Convertible Notes was 100% of par.

The notes are the Company’s general unsecured and unsubordinated obligations and will rank equally in right of payment with all of the Company’s existing and future unsecured and unsubordinated indebtedness, and senior in right of payment to any of the Company’s future indebtedness that is expressly subordinated to the notes.

The notes will be effectively subordinated to all of the Company’s existing and future secured indebtedness, including the Company’s 2026 Senior Secured Notes, to the extent of the value of the collateral securing that indebtedness, and structurally subordinated to all indebtedness and other liabilities of the Company’s subsidiaries, including trade credit.

Optional Redemption .

The Company may not redeem the notes prior to August 1, 2023.

On or after August 1, 2023, the Company may redeem for cash all of the notes if the last reported sale price of the Company’s common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (which need not be consecutive trading days) during any 30 consecutive trading-day period ending within five trading days prior to the date on which the Company provides notice of redemption.

Conversion Rights .

The 2026 Convertible Notes are convertible into shares of the Company’s common stock based on an initial conversion rate of 234.2971 shares of common stock per $1,000 principal amount of Convertible Notes (equivalent to a conversion price of approximately $4.27 per share of the Company’s common stock), at any time prior to the close of business on the business day immediately preceding the maturity date, in principal amounts of $1,000 or an integral multiple of $1,000 in excess thereof.

In addition, following a Make-Whole Fundamental Change (as defined in the Convertible Indenture) or the Company’s delivery of a notice of redemption for the 2026 Convertible Notes, the Company will, in certain circumstances, increase the conversion rate for a holder who elects to convert its 2026 Convertible Notes in connection with (i) such Make-Whole Fundamental Change or (ii) such notice of redemption.

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MSD PCOF Partners IX, LLC (“MSD”)

Obligations under the 2020 Revolving Credit Agreement constitute a First-Out Debt, as defined in the Senior Indenture, and are secured on a pari passu basis with the Secured Notes.

As provided under a Collateral Trust Joinder, the lender was added as a secured party to the Collateral Trust Agreement, and accordingly the pari passu obligations and commitments under the Credit Agreement are secured equally and ratably by the collateral of the Secured Notes.

The Revolving Credit Agreement has a maturity date of February 23, 2024.

Obligations under the Revolving Credit Agreement constitute a First-Out Debt, as defined in the Secured Indenture, and are secured on a pari passu basis with the 2026 Senior Secured Notes.

As provided under a Collateral Trust Joinder, the lender was added as a secured party to the Collateral Trust Agreement, and accordingly the pari passu obligations and commitments under the Revolving Credit Agreement are secured equally and ratably by the collateral of the Secured Notes.

Infrastructure

The Wells Fargo Facility and the TCW Loan associated with our Infrastructure segment contain customary restrictive and financial covenants related to debt levels and performance.

The UMB Term Loan and UMB Revolving Line associated with our Infrastructure segment contains customary restrictive and financial covenants related to debt levels and performance.

As of December 31, 2021, DBMG was in compliance with all of the financial covenants to its debt agreements.

Debt Obligations to the Consolidated Financial Statements for additional details regarding the Company's indebtedness.

Debt Obligations to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for additional details regarding the Company's indebtedness.

Restrictive Covenants

The indenture governing the Senior Secured Notes dated November 20, 2018, by and among HC2, the guarantors party thereto and U.S.

Bank National Association, a national banking association ("U.S.

Bank"), as trustee (the "Secured Indenture"), contains certain affirmative and negative covenants limiting, among other things, the ability of the Company, and, in certain cases, the Company’s subsidiaries, to incur additional indebtedness;

The indenture governing the 2026 Senior Secured Notes dated February 1, 2021, by and among INNOVATE, the guarantors party thereto and U.S.

Bank National Association, a national banking association, as trustee (the "Secured Indenture"), contains certain affirmative and negative covenants limiting, among other things, the ability of the Company, and, in certain cases, the Company’s subsidiaries, to incur additional indebtedness;

create liens;

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The Company is also required to comply with certain financial maintenance covenants, which are similarly subject to a number of important exceptions and qualifications.

These covenants include maintenance of (1) liquidity;

(2) collateral coverage;

(3) secured net leverage ratio;

and (4) fixed charge coverage ratio.

These covenants include maintenance of (1) liquidity and (2) collateral coverage.

The maintenance of liquidity covenant provides that the Company will not permit the aggregate amount of (i) all unrestricted cash and Cash Equivalents of the Company and the Subsidiary Guarantors, (ii) amounts available for drawing under revolving credit facilities and undrawn letters of credit of the Company and the Subsidiary Guarantors and (iii) dividends, distributions or payments that are immediately available to be paid to the Company by any of its Restricted Subsidiaries to be less than the Company’s obligation to pay interest on the 2026 Senior Secured Notes and all other Debt, including Convertible Preferred Stock mandatory cash dividends or any other mandatory cash pay Preferred Stock but excluding any obligation to pay interest on Convertible Preferred Stock or any other mandatory cash pay Preferred Stock which, in each case, may be paid by accretion or in-kind in accordance with its terms of the Company and its Subsidiary Guarantors for the next six months.

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As of December 31, 2021, the Company was in compliance with this covenant.

The maintenance of secured net leverage ratio provides that the Company’s Secured Net Leverage Ratio (as defined in the Secured Indenture) as of any date of determination calculated on a pro forma basis after accounting for the net proceeds from any Asset Sale which the Company has determined to apply to the repayment of any Debt to exceed 7.75 to 1.00.

As of December 31, 2020, the Company was in compliance with this covenant.

The maintenance of fixed charge coverage ratio provides that commencing with the fiscal year ending December 31, 2019, that the Company will not permit the Fixed Charge Coverage Ratio (as defined in the Secured Indenture) calculated as of the last day of each fiscal year of the Company to be less than 1.00 to 1.00 or that the Company’s “HC2 Corporate Overhead” (as defined in the Secured Indenture) in any fiscal year not exceed the sum of $29.0 million for such fiscal year.

As of December 31, 2019 the Company was in compliance.

The instruments governing the Company’s Preferred Stock also limit the Company’s and its subsidiaries ability to take certain actions, including, among other things, to incur additional indebtedness;

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These limitations are subject to a number of important exceptions and qualifications.

On February 1, 2021, HC2 closed on $330.0 million of 8.500% senior secured notes due 2026 at an issue price of 100%.

The Notes will be senior secured obligations of the Company and will be guaranteed by certain of the Company's domestic subsidiaries.

The proceeds from the issuance of the Notes were used, together with the net cash proceeds of the Company’s previously announced sale of its majority-owned subsidiary Beyond6, Inc., to redeem in full HC2’s existing 11.50% senior secured notes, repay the outstanding indebtedness under its revolving credit agreement, pay related fees and expenses, and for general corporate purposes.

The Company conducted its operations in a manner that resulted in compliance with the prior Secured Indenture;

The Company conducted its operations in a manner that resulted in compliance with the Secured Indenture;

however, compliance with certain financial covenants for future periods may depend on the Company or one or more of the Company’s subsidiaries undertaking one or more non-operational transactions, such as the management of operating cash outflows, a monetization of assets, a debt incurrence or refinancing, the raising of equity capital, or similar transactions.

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Years Ended December 31, Increase / (Decrease)

Operating activities from Continuing Operations $ 52.4 $ 53.2 $ (0.8)

Investing activities from Continuing Operations 185.7 (209.2) 394.9

Financing activities from Continuing Operations (196.4) 33.7 (230.1)

Cash used in continuing operating activities $ (6.5) $ (55.2) $ 48.7

Cash provided by discontinued operating activities 33.5 96.3 (62.8)

Cash provided by operating activities 27.0 41.1 (14.1)

Cash (used in) provided by continuing investing activities (1.9) 261.9 (263.8)

Cash used in discontinued investing activities (221.3) (99.8) (121.5)

Cash (used in) provided by investing activities (223.2) 162.1 (385.3)

Cash provided by (used in) continuing financing activities 11.9 (182.5) 194.4

Cash used in discontinued financing activities (7.6) (22.0) 14.4

Cash provided by (used in) financing activities 4.3 (204.5) 208.8

Effect of exchange rate changes on cash and cash equivalents (1.3) 1.1 (2.4)

Cash flows from discontinued operations (42.3) 31.8 (74.1)

Net increase (decrease) in cash, cash equivalents and restricted cash $ 0.1 $ (89.8) $ 89.9

Net (decrease) increase in cash and cash equivalents classified within current assets held for sale (38.6) 20.9 (59.5)

Net decrease in cash, cash equivalents and restricted cash $ (193.2) $ (0.2) $ (193.0)

Net decrease in cash and cash equivalents from discontinued operations (195.4) (20.8) (174.6)

Net change in cash, cash equivalents and restricted cash $ 2.2 $ 20.6 $ (18.4)

Operating Activities

Cash provided by operating activities was $52.4 million for the year ended December 31, 2020 as compared to cash provided by operating activities of $53.2 million for the year ended December 31, 2019.

The $0.8 million change was the result of the working capital improvements in our Infrastructure segment offset by declines in working capital at our Life Sciences segment.

Our Infrastructure segment benefited from increased billings in excess of costs on new projects.

Our Life Sciences segment incurred additional costs as it ramped up efforts to achieve commercialization of its products.

Cash used in operating activities was $6.5 million for the year ended December 31, 2021 as compared to cash used in operating activities of $55.2 million for the year ended December 31, 2020.

The $48.7 million change was primarily related to driven by favorable working capital movements in Non-Operating Corporate due to the change in timing of our interest payments on our Senior Secured Notes and 2026 Convertible Notes, the settlement of the DBMG class action suit in 2020, and lower operating expenses at Non-Operating Corporate.

Additionally, Infrastructure had higher operating profits, which were partially offset by negative working capital movements, as well as R2, which had a decrease in working capital driven by a ramp up of expenses related to its product launch.

Investing Activities

Cash provided by investing activities was $185.7 million for the year ended December 31, 2020 as compared to cash used in investing activities of $209.2 million for the year ended December 31, 2019.

The $394.9 million change was from the proceeds from sales of subsidiaries, largely GMSL and HMN during the current year, and a decline in net investment activity at our Insurance Segment.

Cash used by investing activities was $1.9 million for the year ended December 31, 2021 as compared to cash provided by investing activities of $261.9 million for the year ended December 31, 2020.

The $263.8 million change was due to the acquisition of Banker Steel at our Infrastructure segment in the second quarter of 2021 and less proceeds from the sale of subsidiaries.

Beyond6 was sold in first quarter of 2021 for net proceeds of $70.0 million and the cash portion of our Insurance segment was sold in the third quarter for $64.7 million compared to GMSL sold in the prior year for net proceeds of $144.0 million and the partial sale of the HMN joint venture in the prior year.

Financing Activities

Cash used in financing activities was $196.4 million for the year ended December 31, 2020 as compared cash provided by financing activities of $33.7 million for the year ended December 31, 2019.

The $230.1 million change was largely a result of the principal payments on debt obligations at our Corporate segment and payments to minority stockholders at our Other segment for the portion of the proceeds received from the sale of GMSL and HMN.

Further adding to the decline were payments on borrowings at our Infrastructure and Spectrum segments when compared to the prior period.

This was partially offset by proceeds received from HC2's 2020 rights offering and issuance of Series B Preferred Stock.

Cash provided by financing activities was $11.9 million for the year ended December 31, 2021 as compared to cash used in financing activities of $182.5 million for the year ended December 31, 2020.

The $194.4 million change was primarily due to an increase at Infrastructure to purchase Banker Steel in the second quarter of 2021 and higher debt repayments in 2020, mostly from proceeds received from asset sales and non-controlling interest distributions attributable to prior year asset sales.

Discontinued Operations

Cash used in discontinued operations was $42.3 million for the year ended December 31, 2020 as compared to cash provided by discontinued operations of $31.8 million for the year ended December 31, 2019.

The $74.1 million decrease was largely due to the timing of sales of subsidiaries during the year, cash balances at the subsidiaries which was included as part of these sales, and lower working capital at ICS compared to the prior year.

Cash used by discontinued operations was $195.4 million for the year ended December 31, 2021 as compared to cash used by discontinued operations of $20.5 million for the year ended December 31, 2020.

The $169.9 million decrease was largely due to a decline in net investment purchases at our Insurance segment compared to the prior year.

Reclassifications

Certain 2021 statement of cash flow items have been reclassified to conform to the current financial statement presentation.

These reclassifications have no effect on previously reported net income.

Infrastructure

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However, DBMG may expand its operations through future acquisitions and may require additional equity or debt financing.

CIG’s principal cash inflows from its operating activities relate to its premiums, annuity deposits and insurance, investment product fees and other income.

CIG’s principal cash inflows from its invested assets result from investment income and the maturity and sales of invested assets.

The primary liquidity concern with respect to these cash inflows relates to the risk of default by debtors and interest rate volatility.

Additional sources of liquidity to meet unexpected cash outflows in excess of operating cash inflows and current cash and equivalents on hand include selling short-term investments or fixed maturity securities.

CIG's principal cash outflows relate to the payment of claims liabilities, interest credited and operating expenses.

CIG’s management believes its current sources of liquidity are adequate to meet its cash requirements for the next 12 months.

Market environment

As of December 31, 2020, CIG was in a position to hold any investment security showing an unrealized loss until recovery, provided it remains comfortable with the credit of the issuer.

CIG does not rely on short-term funding or commercial paper and to date it has experienced no liquidity pressure, nor does it anticipate such pressure in the foreseeable future.

CIG projects its reserves to be sufficient and believes its current capital base is adequate to support its business.

Dividend Limitations

CIG's insurance subsidiary is subject to Texas statutory provisions that restrict the payment of dividends.

The maximum amount of dividends which can be paid to stockholders by life insurance companies domiciled in the State of Texas without prior approval of the Insurance Commissioner is the greater of 10% of surplus as regards to policyholders or net gain on operations as of the preceding year end, but only to the extent of earned surplus as of the preceding year end.

The maximum amount of dividends payable in 2020 and 2019 without prior approval was $0 based on statutory earned deficit.

In addition to the limitations noted above, laws and regulations require, among other items, that the CIG’s insurance subsidiary maintain minimum solvency requirements, which may limit the amount of dividends this subsidiary can pay.

Along with solvency regulations, the primary driver in determining the amount of capital used for dividends is the level of capital needed to maintain desired financial strength in the form of its subsidiary Risk-Based Capital ("RBC") ratio.

CIG monitors its insurance subsidiary's compliance with the RBC requirements specified by the National Association of Insurance Commissioners.

As of December 31, 2020, CIG’s insurance subsidiary exceeded the minimum RBC requirements.

Insurance Companies Capital Contributions

The Company has an agreement with the TDOI that, for two years from August 9, 2018, CIG will contribute to Continental General Insurance Company (“CGI” or the “Insurance Company”) cash or marketable securities acceptable to the TDOI to the extent required for CGI’s total adjusted capital to be not less than 450% of CGI’s authorized control level risk-based capital and for three years from August 9, 2020, CIG will contribute to CGI cash or marketable securities acceptable to the TDOI to the extent required for CGI’s total adjusted capital to be not less than 400% of CGI’s authorized control level risk-based capital (each as defined under Texas law and reported in CGI’s statutory statements filed with the TDOI).

Additionally, CGI entered into a capital maintenance agreement with Great American.

Under the agreement, if the applicable acquired company’s total adjusted capital reported in its annual statutory financial statements is less than 400% of its authorized control level risk-based capital, Great American agreed to pay cash or assets to the applicable acquired company as required to eliminate such shortfall (after giving effect to any capital contributions made by the Company or its affiliates since the date of the relevant annual statutory financial statement).

Great American’s obligation to make such payments is capped at $35.0 million under the capital maintenance agreement.

The capital maintenance agreements remained in effect from January 1, 2016 to January 1, 2021 or until payments by Great American under the applicable agreement equal the applicable cap.

Pursuant to the purchase agreement, the Company is required to indemnify Great American for the amount of any payments made by Great American under the capital maintenance agreements.

As of the date of this filing, the agreement has expired.

Asset Liability Management

CIG’s insurance subsidiary maintains investment strategies intended to provide adequate funds to pay benefits without forced sales of investments.

Products having liabilities with longer durations, such as long-term care insurance, are matched with investments such as long-term fixed maturity securities.

Shorter-term liabilities are matched with fixed maturity securities that have short- and medium-term fixed maturities.

The types of assets in which CIG may invest are influenced by state laws, which prescribe qualified investment assets applicable to insurance companies.

Within the parameters of these laws, CIG invests in assets giving consideration to four primary investment objectives:

(i) maintain robust absolute returns;

(ii) provide reliable yield and investment income;

(iii) preserve capital and (iv) provide liquidity to meet policyholder and other corporate obligations.

The Insurance segment’s investment portfolio is designed to contribute stable earnings and balance risk across diverse asset classes and is primarily invested in high quality fixed income securities.

In addition, at any given time, CIG’s insurance subsidiary could hold cash, highly liquid, high-quality short-term investment securities and other liquid investment grade fixed maturity securities to fund anticipated operating expenses, surrenders and withdrawals.

At December 31, 2020 and December 31, 2019, CIG’s investment portfolio is comprised of the following (in millions):

December 31, 2020 December 31, 2019

Fair Value Percent Fair Value Percent

Government and government agencies $ 8.4 0.2 % $ 7.7 0.2 %

States, municipalities and political subdivisions 441.9 9.4 % 440.1 9.9 %

Residential mortgage-backed securities 52.9 1.1 % 66.9 1.5 %

Commercial mortgage-backed securities 97.4 2.0 % 109.4 2.5 %

Asset-backed securities 403.1 8.6 % 577.8 13.1 %

Corporate and other (*)

3,494.1 74.1 % 2,866.8 64.8 %

Common stocks (*)

22.0 0.5 % 25.6 0.6 %

Perpetual preferred stocks 108.8 2.3 % 118.9 2.7 %

Mortgage loans 57.2 1.2 % 183.5 4.1 %

Policy loans 17.8 0.4 % 19.1 0.4 %

Other invested assets 7.7 0.2 % 7.2 0.2 %

Total $ 4,711.3 100.0 % $ 4,423.0 100.0 %

(*) Balance includes fair value of certain securities held by the Company, which are eliminated in consolidation.

Credit Quality

Insurance statutes regulate the type of investments that CIG is permitted to make and limit the amount of funds that may be used for any one type of investment.

In light of these statutes and regulations, and CIG's business and investment strategy, CIG generally seeks to invest in (i) securities rated investment grade by established nationally recognized statistical rating organizations (each, a nationally recognized statistical rating organization ("NRSRO")), (ii) U.S.

Government and government-sponsored agency securities, or (iii) securities of comparable investment quality, if not rated.

The following table summarizes the credit quality, by NRSRO rating, of CIG's fixed income portfolio (in millions):

December 31, 2020 December 31, 2019

Fair Value Percent Fair Value Percent

AAA, AA, A $ 2,007.9 44.6 % $ 1,954.9 48.1 %

BBB 2,185.2 48.6 % 1,834.5 45.1 %

Total investment grade 4,193.1 93.2 % 3,789.4 93.2 %

BB 187.9 4.2 % 210.7 5.2 %

B 49.3 1.1 % 18.0 0.4 %

CCC, CC, C 59.5 1.3 % 37.9 0.9 %

D 8.0 0.2 % 12.7 0.3 %

Total non-investment grade 304.7 6.8 % 279.3 6.8 %

Total $ 4,497.8 100.0 % $ 4,068.7 100.0 %

Discontinued Operations

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• The sale of GMSL closed on February 28, 2020.

At the time of the sale, the Company recorded a $39.3 million loss on the sale, inclusive of recognizing a $31.3 million loss from the realization of AOCI.

At the time of the sale, the Company recorded a $39.3 million loss on the sale and recognized $31.3 million Accumulated other comprehensive loss.

During the fourth quarter of 2020, the Company recognized a gain of $2.4 million as a result of bonding releases related to projects which existed prior to sale.

During the first quarter of 2021, the Company recognized a gain of $1.2 million as a result of indemnity release.

• The sale of ICS and its subsidiary, Go2 Tel, Inc., closed on October 31, 2020.

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The sale closed on January 15, 2021.

During the first quarter of 2021, the Company recognized a $39.2 million gain on the sale.

During the third quarter of 2021, as a result of releases of related escrows and holdbacks, the Company recognized an additional $0.5 million gain on the sale.

• The sale of CIG closed on July 1, 2021 to Continental General Holdings LLC, an entity controlled by Michael Gorzynski, a director of the Company and, as of December 31, 2021, a beneficial owner of approximately 6.6% of the Company's outstanding common stock who has also served as executive chairman of Continental since October 2020.

The Company recorded a $200.8 million loss on the sale.

Cash flows from discontinued operations are reported in the Statement of Cash Flows as a separate line item within the Operations, Investing and Financing activities sections for each year presented.

In the absence of cash flows from the discontinued operations, the Company does not expect there to be an impact on liquidity at the Company.

Off-Balance Sheet Arrangements

In September 2018, the Company entered into a 75-month lease for office space.

As part of the agreement, HC2 was able to pay a lower security deposit and lease payments, and received a favorable lease terms as consideration for landlord required cross default language in the event of default of the shared space leased by Harbinger Capital Partners ("HCP"), formerly a related party, as disclosed in Note.

Related Parties.

With the adoption of ASC 842, as of January 1, 2019, this lease was recognized as a right of use asset and lease liability on the Consolidated Balance Sheets.

DBMG’s off-balance sheet arrangements at December 31, 2020 included letters of credit of $9.8 million under Credit and Security Agreements and performance bonds of $88.8 million.

DBMG’s contract arrangements with customers sometimes require DBMG to provide performance bonds to partially secure its obligations under its contracts.

Bonding requirements typically arise in connection with public works projects and sometimes with respect to certain private contracts.

DBMG’s performance bonds are obtained through surety companies and typically cover the entire project price.

New Accounting Pronouncements

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Summary of Significant Accounting Policies to our Consolidated Financial Statements included in this Annual Report on Form 10-K.

Critical Accounting Policies

Critical Accounting Estimates

The preparation of financial statements in accordance with generally accepted accounting principles in the U.S.

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For all of these estimates, we caution that future events rarely develop exactly as forecast, and the best estimates routinely require adjustment.

Summary of Significant Accounting Policies, to the Notes to Consolidated Financial Statements which discusses the significant accounting policies that we have adopted.

Fair Value Measurements

In determining the estimated fair value of our investments, fair values are based on unadjusted quoted prices for identical investments in active markets that are readily and regularly obtainable.

When such quoted prices are not available, fair values are based on quoted prices in markets that are not active, quoted prices for similar but not identical investments, or other observable inputs.

If these inputs are not available, or observable inputs are not determinable, unobservable inputs and/or adjustments to observable inputs requiring management judgment are used to determine the estimated fair value of investments.

The methodologies, assumptions and inputs utilized are described in Note 2.

Summary of Significant Accounting Policies.

Financial markets are susceptible to severe events evidenced by rapid depreciation in asset values accompanied by a reduction in asset liquidity.

Our ability to sell investments, or the price ultimately realized for investments, depends upon the demand and liquidity in the market and increases the use of judgment in determining the estimated fair value of certain investments.

Valuation of fixed maturity securities

Fixed maturity securities are classified as available for sale and are carried at fair value with changes in fair value recorded in accumulated other comprehensive income (loss) within stockholders' equity.

Fair value is defined as the price at which an asset could be exchanged in an orderly transaction between market participants at the balance sheet date.

Determining fair value for a financial instrument requires management judgment.

The degree of judgment involved generally correlates to the level of pricing readily observable in the markets.

Financial instruments with quoted prices in active markets or with market observable inputs to determine fair value, such as public securities, generally require less judgment.

Conversely, private placements including more complex securities that are traded infrequently are typically measured using pricing models that require more judgment as to the inputs and assumptions used to estimate fair value.

There may be a number of alternative inputs to select based on an understanding of the issuer, the structure of the security and overall market conditions.

In addition, these factors are inherently variable in nature as they change frequently in response to market conditions.

Fair Value of Financial Instruments for a discussion of our fair value measurements, the procedures performed by management to determine that the amounts represent appropriate estimates.

Typically, the most significant input in the measurement of fair value is the market interest rate used to discount the estimated future cash flows of the instrument.

Such market rates are derived by calculating the appropriate spreads over comparable U.S.

Treasury securities, based on the credit quality, industry and structure of the asset.

Assessment of "other-than-temporary" impairments on fixed maturity securities

Certain fixed maturity securities with a fair value below amortized cost are carried at fair value with changes in fair value recorded in accumulated other comprehensive income.

For these investments, we have determined that the decline in fair value below its amortized cost is temporary.

To make this determination, we evaluated the expected recovery in value and our intent to sell or the likelihood of a required sale of the fixed maturity prior to an expected recovery.

In making this evaluation, we considered a number of general and specific factors including the regulatory, economic and market environments, length of time and severity of the decline, and the financial health and specific near term prospects of the issuer.

If we subsequently determine that the excess of amortized cost over fair value is other-than-temporary for any or all of these fixed maturity securities, the amount recorded in accumulated other comprehensive income would be reclassified to stockholders' net income as an impairment loss.

Refer to Note 2.

Summary of Significant Accounting Policies to our Consolidated Financial Statements included in this Annual Report on Form 10-K which discusses the significant accounting policies that we have adopted.

Revenue Recognition - Estimated Costs to Complete

With respect to our Infrastructure segment (DBM Global Inc.), we recognize a significant portion of our revenue over time using the input method to measure the progress of costs incurred for our service and construction contracts.

DBM Global Inc.

performs its services primarily under fixed-price contracts and recognizes revenue over time using the input method to measure progress for its projects.

The nature of the projects does not provide measurable value to the customer over time and control does not transfer to the customer at discrete points in time.

The customer receives value over the term of the project based on the amount of work that has been completed towards the delivery of the completed project.

The most reliable measure of progress is the cost incurred towards delivery of the completed project.

Therefore, the input method provides the most reliable method to measure progress.

Revenue recognition begins when work has commenced.

Costs include all direct material and labor costs related to contract performance, subcontractor costs, indirect labor, and fabrication plant overhead costs, which are charged to contract costs as incurred.

Revenues relating to changes in the scope of a contract are recognized when we and a customer or general contractor have agreed on both the scope and price of changes, the work has commenced, it is probable that the costs of the changes will be recovered and that realization of revenue exceeding the costs is assured beyond a reasonable doubt.

Revisions in estimates during the course of contract work are reflected in the accounting period in which the facts requiring the revision become known.

Provisions for estimated losses on uncompleted contracts are made in the period a loss on a contract becomes determinable.

Convertible Instruments

We evaluate and account for conversion options embedded in convertible instruments in accordance with ASC 815, Derivatives and Hedging Activities .

Applicable U.S.

Generally Accepted Accounting Principals ("GAAP") requires companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments according to certain criteria.

The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not remeasured at fair value under other GAAP with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.

We account for convertible instruments, when it has been determined that the embedded conversion options should not be bifurcated from their host instruments, as follows:

we record, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note.

Debt discounts under these arrangements are amortized over the term of the related debt to their stated date of redemption.

We account for the conversion of convertible debt when a conversion option has been bifurcated using the general extinguishment standards.

The debt and equity linked derivatives are removed at their carrying amounts and the shares issued are measured at their then-current fair value, with any difference recorded as a gain or loss on extinguishment of the two separate accounting liabilities.

Share-Based Compensation

We account for share-based compensation issued to employees in accordance with the provisions of ASC 718 and to non-employees pursuant to ASC 505-50, Equity-based payments to non-employees .

All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for using a fair-value based method.

We record share-based compensation expense for all new and unvested stock options that are ultimately expected to vest as the requisite service is rendered.

We issue new shares of common stock upon the exercise of stock options.

We use a Black-Scholes option valuation model to determine the grant date fair value of share-based compensation under ASC 718.

The Black-Scholes model incorporates various assumptions including the expected term of awards, volatility of stock price, risk-free rates of return and dividend yield.

The expected term of an award is no less than the option vesting period and is based on our historical experience.

Expected volatility is based upon the historical volatility of our stock price.

The risk-free interest rate is approximated using rates available on U.S.

Treasury securities with a remaining term similar to the option’s expected life.

We use a dividend yield of zero in the Black-Scholes option valuation model as it does not anticipate paying cash dividends in the foreseeable future.

Share-based compensation is recorded net of actual forfeitures.

Our annual tax rate is based on our income, statutory tax rates, exchange rates and tax planning opportunities available to us in the various jurisdictions in which we operate.

Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities.

Significant judgment is required in determining our tax expense and in evaluating our tax positions including evaluating uncertainties under ASC 740.

Significant judgment is required in determining our tax expense and in evaluating our tax positions, including evaluating uncertainties under ASC No.

740, “Income Taxes” (“ASC 740”).

We review our tax positions quarterly and adjust the balances as new information becomes available.

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We must make significant estimates and assumptions about future taxable income and future tax consequences when determining the amount of the valuation allowance.

The additional guidance provided by ASC No.

740, “Income Taxes” (“ASC 740”), clarifies the accounting for uncertainty in income taxes recognized in the financial statements.

The additional guidance provided by ASC 740, clarifies the accounting for uncertainty in income taxes recognized in the financial statements.

Expected outcomes of current or anticipated tax examinations, refund claims and tax-related litigation and estimates regarding additional tax liability (including interest and penalties thereon) or refunds resulting therefrom will be recorded based on the guidance provided by ASC 740 to the extent applicable.

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The judgments and estimates made at a point in time may change based on the outcome of tax audits, expiration of statutes of limitations, as well as changes to, or further interpretations of, tax laws and regulations.

Income Taxes, to the "Notes to Consolidated Financial Statements" for further information.

In relation to tax effects for accumulated OCI, our policy is to release the tax effects of amounts reclassified from accumulated OCI to pre-tax income (loss) from continuing operations.

Any remaining tax effect in accumulated OCI is released following a portfolio approach.

Income Taxes to our Consolidated Financial Statements included in this Annual Report on Form 10-K for further information.

Goodwill and Intangible Assets

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The estimates of future cash flows involve considerable management judgment and are based upon assumptions about expected future operating performance, economic conditions, market conditions, and cost of capital.

Inherent in estimating the future cash flows are uncertainties beyond our control, such as capital markets.

Inherent in estimating the future cash flows are

uncertainties beyond our control, such as capital markets.

The actual cash flows could differ materially from management's estimates due to changes in business conditions, operating performance, and economic conditions.

What changed 10-K

Item 7. Management’s Discussion and Analysis